4. If CHAPTER FIVE Rink 5. expected returns and Management returns portfolio 6.
ID: 2637411 • Letter: 4
Question
4. If CHAPTER FIVE Rink 5. expected returns and Management returns portfolio 6. an of Stock are the same the standard deviations of the investor do security is be but positive versifi to rred? Indiffe correlation? should he or she seek investments that have a high 7. o's risk measured? used in portfolio theory risk and return. How is the portfo- tor's, what If one investor's 8. What a does that indi about their curves are steeper than another inves- If is cate respective the correlation coeffici associated What do beta willingness to bear risk? 9. with the for a stock and the 0.5,1.0, and 1.5 mean? 10. ow are the capital market market equals 0, what is the market risk N g represent? line and the How does security market line different? What does each arbitrage pricing theory advance our understanding of security returns? RELATIONSHIPS AND ILLUSTRATED FUNDAMENTAL PROBLEMS Relationships 1. An increase in expected returns implies in capital gains. in expected income or 2. An increase in the number of securities in a portfolio 3. Unsystematic risk as a portfolio becomes more diversified. 4. A decrease in the standard deviation of returns suggests that risk systematic risk. 5. An increase in the correlation of returns a portfolio's risk. 6. If the corralana...Explanation / Answer
4. if expected return is same then selection criteria lies with standard deviation. it is also called as total risk . That security whose standard deviation is less in comparision will be selected as it is less risky and return will be stable.
5. High positive crrelation will lead investment in to only one direction, either profit or loss. so we should aim for those invsetment where correlation should not be strong or very positively strong.
6. portfolio risk depends upon weightage of the security, standard deviation of the secuirty and correlation coefficient between two security
in 2 security case
portfolio risk = ((Weight of security 1* standard deviation of security 1 )2 + (Weight of security 2* standard deviation of security 2)2 + 2*Weight of security 1* standard deviation of security 1*Weight of security 2* standard deviation of security 2*correlation coefficient between security 1&2).5
Indifference curve represents the risk profile of an investor. High steeper indiffrence curve will change the risk profile.
7. Beta = (Covariance between Security and market index) / Variance of the market
it reflects the risk part of secuirty.
High Beta means high risk stock. in given data, stock with 1.5 will be most risky. it will grow 50% more and fall 50% more incomparision to index.
8. Then stock will be independent of changes in index.
9.in CML we measure trade off between stock return and total risk. Efficient frontier is tangent upon CML. in SML we measure stock return and Beta.
10 APT says that security return not only depends upon market return but also on so many other macro economic variables and security market factors. It helps us to understand the impact of factors such as market capitalization market price to book value ration, GDP, inflation and others.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.