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FIN401-Chapter 6 (exam 2)

Fin401 chapter 6 exam 2

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Unformatted text preview: Chapter 6 Chapter Efficient Diversification Investment Decisions Investment Investment decisions involve uncertainty Focus on expected returns Focus expected Estimates of future returns needed Goal: reduce risk without affecting returns Goal: reduce Accomplished by building a portfolio Accomplished building Diversification is key Portfolio Expected Return Portfolio Weighted average of individual security expected Weighted returns returns Each portfolio asset has a weight, w, which Each represents the percent of the total portfolio value the The expected return on any portfolio can be The calculated as: calculated n E(R p ) = ∑ w iE(R i ) i=1 Portfolio Risk Portfolio Portfolio risk not simply the sum of individual Portfolio security risks security Emphasis on the risk of the entire portfolio Emphasis risk Individual stocks are risky only if they add risk to the total portfolio risk Portfolio Risk Portfolio Measured by the variance or standard deviation of the portfolio’s return portfolio’s Portfolio risk is not a weighted average of the risk...
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