Podcast
Questions and Answers
What is the formula for calculating portfolio variance?
What is the formula for calculating portfolio variance?
- $w1σ1 + w2σ2 - 2w1w2Cov(1,2)$
- $w1^2σ1 + w2^2σ2 - 2w1w2Cov(1,2)$
- $w1σ1 + w2σ2 + 2w1w2Cov(1,2)$
- $w1^2σ1^2 + w2^2σ2^2 + 2w1w2Cov(1,2)$ (correct)
If the correlation coefficient between two assets is 1, what does this indicate?
If the correlation coefficient between two assets is 1, what does this indicate?
- Perfect negative correlation
- No correlation
- Perfectly random correlation
- Perfect positive correlation (correct)
In the context of a portfolio, what does a higher covariance between two assets imply?
In the context of a portfolio, what does a higher covariance between two assets imply?
- Less diversification benefits (correct)
- Lower risk
- Higher diversification benefits
- Higher expected return
How is the standard deviation of a portfolio affected by the correlations between its assets?
How is the standard deviation of a portfolio affected by the correlations between its assets?
Why might an investor choose to diversify their portfolio?
Why might an investor choose to diversify their portfolio?
What effect does a higher weight in a high standard deviation asset have on the overall portfolio volatility?
What effect does a higher weight in a high standard deviation asset have on the overall portfolio volatility?
Which measure is used to find the risk of a portfolio by assessing how the returns of two stocks move together?
Which measure is used to find the risk of a portfolio by assessing how the returns of two stocks move together?
If the covariance between two stock returns is negative, what does it indicate about their movements?
If the covariance between two stock returns is negative, what does it indicate about their movements?
What is used to normalize the covariance and provide a measure of common risk shared by stocks?
What is used to normalize the covariance and provide a measure of common risk shared by stocks?
Which measure helps reduce risk through diversification by considering how prices of different stocks move together?
Which measure helps reduce risk through diversification by considering how prices of different stocks move together?
What does portfolio variance measure in terms of risk for a set of securities in a portfolio?
What does portfolio variance measure in terms of risk for a set of securities in a portfolio?
If the correlation between two stocks is -1, what does this imply about their relationship in terms of movements?
If the correlation between two stocks is -1, what does this imply about their relationship in terms of movements?
What is the main difference between an inefficient portfolio and an efficient portfolio?
What is the main difference between an inefficient portfolio and an efficient portfolio?
How does correlation affect the volatility of a portfolio?
How does correlation affect the volatility of a portfolio?
Why might it be beneficial to add Bore Industries to a two-stock portfolio despite having lower returns?
Why might it be beneficial to add Bore Industries to a two-stock portfolio despite having lower returns?
What is the impact of changing the correlation between stocks on portfolio volatility?
What is the impact of changing the correlation between stocks on portfolio volatility?
What is the key difference between a short position and a long position in investments?
What is the key difference between a short position and a long position in investments?
What happens to the curve representing portfolios when correlation between assets decreases?
What happens to the curve representing portfolios when correlation between assets decreases?
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