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AC1106

Portfolio

TermDefinition
Variance Average value of squared deviations from mean A measure of volatility
Standard Deviation Squared Root of variance
Covariance Measure the direction of relationship between 2 variables
Expected Return The return on a risky asset expected in the future
2 States of the Economy We think a boom and a recession are equally likely to happen
Risk Premium Expected Return - Risk Free Rate
Calculating the Variance 1. Determine the squared deviations from the expected return 2. Multiply each possible squared deviation by its probability 3. Add these up and result is the variance
Calculating the Covariance 1. Determine the deviations from the expected return 2. Multiply each possible deviation for X by the possible deviation for Y by its probability 3. Add these up and the result is the covariance
Portfolio Group of assets held by an investor e.g bonds/assets
Portfolio Weight The % of the portfolio's total value that is in a particular asset
Diversification Spreading an investment among number of assts, will eliminate some, but not all, of the risk
Unsystematic Risk A risk that affects one part/specific company or industry, rather than the whole market. It can be reduced by diversification
For a well diversified portfolio... The unsystematic risk is negligible
Total Risk Systematic Risk+ Unsystematic Risk
Created by: peadarbailey1206
 

 



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