Chapter 11 Page 392 - Only the review questions

Chapter 11 Page 392 - Only the review questions - Because...

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Chapter 11 Page 392 1. What information do you need to compute the expected return of a portfolio? In order to find the expected return of a portfolio we need to calculate the weighted average of the expected returns of the investments within it, using the portfolio weights. 2. What does correlation tell us? Correlation tells us the statistical measure of the relationship between a series of numbers. While evaluating the way a new asset affects the overall risk of a portfolio we can state that the correlation between asset return it’s very important. As soon as the correlation between asset returns is known, the investor would be able to choose the combination of the ones that will reduce the risk. 3. Why isn’t the total risk of a portfolio simply equal to the weighted average of the risks of the securities in the portfolio?
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Unformatted text preview: Because the total risk of a portfolio is only the sum of its non diversifiable and diversifiable risk and a fully diversified portfolio will only have non diversifiable risk. 4. What does beta measure? How do we use beta? Beta measures the expected change and the return of a security or a portfolio, relative to a change in the market return. It also measures only the non diversifiable risk of a portfolio or a security. The higher the beta is, the riskier the security or the portfolio will get. 5. What relation is described by the security market line? Security market line describes the relation between the required return and each level of beta and it is a graphical representation of the capital asset pricing model. References: http://wps.aw.com...
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Chapter 11 Page 392 - Only the review questions - Because...

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