Ch. 11 Objectives for test
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Types of Diversification
1.) Diversifiable Risk
2.) Non-Diversifiable Risk
Diversifiable Risk
a firm specific risk. (unsystematic)
affects a specific product or firm.
Non-Diversifiable Risk
a market risk. (systematic)
Affects ALL firms in a market.
What kind of risk can you reduce/diversify?
(Similar test question)
only a Diversifiable Risk
What kind of risk can you NOT reduce/diversify?
(Similar test question)
Non-Diversifiable Risk
Portfolio Expected Return
expressed as a percent
-use formula from sheet
Correlation
ranges from -1 to +1
-use formula from sheet
Covariance
usually given....
if not, use the correlation formula to solve for it.
(just multiply correlation by the denomonator)
Portfolio Variance
use formula provided on sheet
Opportunity Set
AKA: Feasible Set
-Indicates ALL Possible combinations of Assets.
-Steepest Line is the best!
Minimum Variance Formulas
given on sheet for A
Minimum Variance in Weight B
1- Min Var(A)
Efficient Frontier
INdicates the highest possible rate of return ( line).
-Area above the Minimum Variance point.
CAPM (definition)
capital asset pricing model. Represents the expected return on stock " i ".
Security Market Line
a graphical representation of the Security Market Line
Intercept of SML
Rf
Slope of SML
[ E (Rm) - Rf ]
X-Axis on SML
Bi