Risk and Return

“The Benefits of diversification are clear. Portfolio theory has played a crucial role in explaining the relationship between risk and return where more than one investment is held. It also enables us to identify optimal and efficient portfolios.”

* Correlation coefficient (R-squared) – This represents how well the independent variables (X) explain the response variable (Y).

(a) The mean excess return, standard deviation, and portfolio weights for the minimum variance portfolio.

Nevertheless, such reduction in diversification would make risk increase. The complete table “Risk and returns of portfolios” provides the different changes. 5. The portfolio between TECO – S&P 500 has an expected return of 14.3% and a standard deviation of 14.1%. In this portfolio the correlation is greater than the one in the other portfolio because the risk-reducing effect is much lower than the one in the portfolio TECO – Gold Hill.

The coefficient of variation (CV) is a standardized measure of dispersion about the expected value; it shows the amount of risk per unit of return.

Correlation decribes relationship between things that change together based upon some dependence. There are multiples examples of correlation. My power utility bills goes up a lot in winter. This is a negative correaltion for me as it makes me spend more and use more electricity to heat my apartment. Another example of correlation is how good nutrient from Myplate helps keep kids healthy nationwide. The daily value in nutrients, once taken properly help being healthy. This is a good correlation between health and food. one correlation can be positive for a group and be negative for another one. PBR is a brazilian stock for oil. When the barrel of oil cost around a $100 dollars investors are not happy of the price and the stock cost a lot.

Many portfolios are managed to a benchmark, normally an index. Some portfolios are expected to replicate, before trading and other costs, the returns of an index exactly (an index fund), while others are expected to 'actively manage' the portfolio by deviating slightly from the index in order to generate active returns or

CAPM results can be compared to the best expected rate of return that investor can possibly earn in other investments with similar risks, which is the cost of capital. Under the CAPM, the market portfolio is a well-diversified, efficient portfolio representing the non-diversifiable risk in the economy. Therefore, investments have similar risk if they have the same sensitivity to market risk, as measured by their beta with the market portfolio.

Randolph Corporation is a multidivisional company. Due to frictions among the divisions, Randolph’s stock has not performed according to expectations. In order to improve Randolph’s financial situation and position among its competitors, a number of questions need to be answered. We will discuss these questions separately below.

The __weight__ of a portfolio is simply the percent of an investment portfolio that is held by a single asset. Sounds simple enough right, let 's think of the weight of a portfolio in terms of pizza slices. If you have 8 slices of pizza and the total value of the pizza is 20 dollars. Each slice of pizza will hold a weight of 40% (8/24=.40 or 40%). That calculation is an example of a portfolio weight by value. There are several ways the weight of a portfolio can be determined. The value calculation is the most basic and used method. Other methods include: cost, unit, sectors, and types of securities.

A portfolio constitutes a collection of investment assets. Investments are divided into broad asset classes. The most important decision one must make when building a portfolio is asset allocation. The percentage of each asset class one wants to hold is more important than the individual securities within each class. One must first decide the percentage of each class to hold. Individual risk tolerance will play a large role in this decision. Many individuals equate risk with the likelihood of losing money, the higher the risk the greater the chance of losing money. Investment professionals use a broader definition of risk. They look at risk as the volatility of an asset, or how much the return stream goes up and down over a certain time period. Commodities are more volatile than Stocks. Stocks are more volatile than Bonds. Therefore, Commodities have more risk than Stocks, and Stocks have more risk than Bonds. An individual's personal risk tolerance will play a major role when deciding among asset classes. An individual willing to take on a lot of risk with the hope of a larger return will hold a larger percentage of high risk investments such as options or futures. A different individual with a lower tolerance for risk will have

If you expect the rate of inflation to be 3% over the next year, then the

Risk parity is an asset management strategy that seeks to balance portfolios based on risk between asset classes. It defines a well-diversified portfolio as one where all asset classes have the same marginal contribution to the risk of the portfolio. By balancing a portfolios risk exposure the portfolio can hedge against changing market conditions in order to capitalize purely on beta return. To do this risk parity funds leverage up until the risk of bonds is equal to the risk of stocks. For example, if a fund has stocks with a standard deviation of 12 and bonds with a standard deviation of 4, the firm will leverage the portfolio until the risk from bonds is equal to the risk from stocks. Giving them a balanced portfolio. This strategy allows investors to have an even better risk-to-return ratio because it diversifies even

Correlation is a measure of degree to which two variables agree, not necessarily in actual value but in general behavior .The two variables are the corresponding pixel values in two images , template and source.

In 1952 the basic concept of the modern portfolio theory was written by Harry Markowitz, in which he explained that assets in an investment portfolio are not only to be selected on the basis of its merit but also by how it’s price changes relative to every other asset in the portfolio. Investment can be stated as a trade-off between expected return and risk, the riskier the investment the higher the return and vice versa. It allows us to make a decision to choose between the portfolio with either the highest rate of return or the lowest amount of risk. The risk of different stocks can be reduced if a portfolio consists of stocks with different risks and returns for example; if stock A has high risk and stock B has low risk, the overall portfolio risk is less, as it is the weighted average of both risks. Owning different shares with different risks in a portfolio is known as diversification. Markowitz hence developed the efficient frontier of portfolio, the efficient set in which investors choose the most suitable portfolio for them. This concept gave birth to the Capital asset pricing model by William Sharpe in 1964 and linter 1965; they state that there are two types of risk, systematic risk and unsystematic risk. The former is the market risk that cannot be diversified while the latter is the risk associated with individual stocks which can be reduced through diversification as stated by the MPT (Investopedia, 2003) Investors basically invest by delaying consumption now