Podcast
Questions and Answers
Which term contributes the most to the portfolio variance?
Which term contributes the most to the portfolio variance?
- $2(0.50)(0.25)(45)$
- $2(400)$
- $2(0.50)(0.25)(189)$ (correct)
- $2(0.25)(0.25)(38)$
What is the standard deviation of return for the portfolio?
What is the standard deviation of return for the portfolio?
- 11.75%
- 195.8751/2
- 11.52%
- 14% (correct)
What is the expected annual return of the portfolio?
What is the expected annual return of the portfolio?
- 195.8751/2
- 132.625
- 14%
- 11.75% (correct)
What is the sum of the first three terms in the calculation?
What is the sum of the first three terms in the calculation?
If the returns on the three assets were independent, what would be the standard deviation of portfolio return?
If the returns on the three assets were independent, what would be the standard deviation of portfolio return?
What is the risk reduction benefit from holding a portfolio of assets called?
What is the risk reduction benefit from holding a portfolio of assets called?
What is the key insight of modern portfolio theory?
What is the key insight of modern portfolio theory?
What would happen to portfolio variance and risk if the covariance terms were negative?
What would happen to portfolio variance and risk if the covariance terms were negative?
What does the diversification benefit increase with?
What does the diversification benefit increase with?
What concept is even more intuitively stated when discussing the diversification benefit?
What concept is even more intuitively stated when discussing the diversification benefit?
Which of the following is used as a measure of reward in modern portfolio theory?
Which of the following is used as a measure of reward in modern portfolio theory?
What is the expected return on a portfolio?
What is the expected return on a portfolio?
Which equation represents the calculation of portfolio expected return?
Which equation represents the calculation of portfolio expected return?
What is the formula for portfolio variance of return?
What is the formula for portfolio variance of return?
Which equation is used to calculate the expected return on the portfolio in the given example?
Which equation is used to calculate the expected return on the portfolio in the given example?
What is used as a measure of investment risk in modern portfolio theory?
What is used as a measure of investment risk in modern portfolio theory?
What is the formula for portfolio variance in a forward-looking sense?
What is the formula for portfolio variance in a forward-looking sense?
What are the weights used in the calculation of portfolio expected return?
What are the weights used in the calculation of portfolio expected return?
What is the measure of risk used in modern portfolio theory?
What is the measure of risk used in modern portfolio theory?
What is the equation for portfolio expected return?
What is the equation for portfolio expected return?
Which equation represents the covariance between two random variables Ri and Rj?
Which equation represents the covariance between two random variables Ri and Rj?
What is the formula for the sample covariance between two random variables Ri and Rj?
What is the formula for the sample covariance between two random variables Ri and Rj?
What is the equation for the variance of a three-asset portfolio?
What is the equation for the variance of a three-asset portfolio?
What is the most compact way to state Equation 5, which represents the variance of a portfolio?
What is the most compact way to state Equation 5, which represents the variance of a portfolio?
What is the general equation for the variance of a portfolio of any size n?
What is the general equation for the variance of a portfolio of any size n?
What does covariance measure?
What does covariance measure?
Which equation represents the calculation of portfolio variance in a forward-looking sense?
Which equation represents the calculation of portfolio variance in a forward-looking sense?
Which term contributes the most to the portfolio variance?
Which term contributes the most to the portfolio variance?
What is the measure of risk used in modern portfolio theory?
What is the measure of risk used in modern portfolio theory?
What is the expected annual return of the portfolio?
What is the expected annual return of the portfolio?
What are the weights used in the calculation of portfolio expected return?
What are the weights used in the calculation of portfolio expected return?
What is the key insight of modern portfolio theory?
What is the key insight of modern portfolio theory?
What is the formula for portfolio variance of return?
What is the formula for portfolio variance of return?
What is used as a measure of investment risk in modern portfolio theory?
What is used as a measure of investment risk in modern portfolio theory?
What is the standard deviation of return for the portfolio?
What is the standard deviation of return for the portfolio?
What is the equation for portfolio expected return?
What is the equation for portfolio expected return?
Study Notes
Portfolio Variance and Risk
- The covariance term contributes the most to the portfolio variance.
- The standard deviation of return for the portfolio is a measure of investment risk.
- The expected annual return of the portfolio is the sum of the weighted returns of individual assets.
Modern Portfolio Theory
- The key insight of modern portfolio theory is that the risk of a portfolio can be reduced through diversification.
- Diversification benefit increases with the number of assets in the portfolio.
- The concept of diversification benefit is more intuitively stated when discussing the risk reduction benefit of holding a portfolio.
Portfolio Return and Variance
- The expected return on a portfolio is the sum of the weighted returns of individual assets.
- The formula for portfolio variance of return is: variance = w1^2 * σ1^2 + w2^2 * σ2^2 + w3^2 * σ3^2 + 2 * w1 * w2 * σ1 * σ2 + 2 * w1 * w3 * σ1 * σ3 + 2 * w2 * w3 * σ2 * σ3.
- The formula for portfolio variance in a forward-looking sense is: variance = w1^2 * σ1^2 + w2^2 * σ2^2 + w3^2 * σ3^2 + 2 * w1 * w2 * σ1 * σ2 + 2 * w1 * w3 * σ1 * σ3 + 2 * w2 * w3 * σ2 * σ3.
- The equation for portfolio expected return is: E(Rp) = w1 * E(R1) + w2 * E(R2) + w3 * E(R3).
- The weights used in the calculation of portfolio expected return are the proportions of each asset in the portfolio.
Covariance and Risk
- Covariance measures the linear relationship between two random variables.
- The formula for the sample covariance between two random variables Ri and Rj is: cov(Ri, Rj) = Σ{(Ri - E(Ri)) * (Rj - E(Rj))} / (n - 1).
- The equation for the variance of a three-asset portfolio is: variance = w1^2 * σ1^2 + w2^2 * σ2^2 + w3^2 * σ3^2 + 2 * w1 * w2 * σ1 * σ2 + 2 * w1 * w3 * σ1 * σ3 + 2 * w2 * w3 * σ2 * σ3.
- The general equation for the variance of a portfolio of any size n is: variance = Σ{wi^2 * σi^2} + 2 * Σ{wi * wj * σi * σj}.
Risk Reduction
- If the returns on the three assets were independent, the standard deviation of portfolio return would be lower.
- If the covariance terms were negative, portfolio variance and risk would decrease.
- The measure of risk used in modern portfolio theory is standard deviation.
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Description
Test your knowledge of portfolio return and risk metrics with this quiz. Explore the concepts of expected return and variance of return in modern portfolio theory.
