Combining Assets: Portfolio Effects

Question 1

what is the formula for risk adjusted return

Answer 1

r/sigma

Question 2

Simple way to calculate weighted return of a portfolio

Answer 2

expected return of the individual assets

Question 3

if the value of two assets increase together, what is their covariance

Answer 3

positive

Question 4

if the value of two assets move in different directions, what is their covariance

Answer 4

negative

Question 5

what is the covariance

Answer 5

product of the average deviations of the assets

Question 6

what is the range of correlation

Answer 6

-1 to +1

Question 7

example of two industries that can expect to have a negative correlation

Answer 7

ice cream shop
umbrella shop

Question 8

three types of correlation

Answer 8

perfect positive (Always move together)

perfect negative

zero

Question 9

what does a correlation of 0 mean

Answer 9

the two assets have no connection

Question 10

what is the efficient frontier

Answer 10

the optimal combination of risk and return

Question 11

in excel, what is a covariance matrix

Answer 11

how assets covary with each other

along the diagonal is how they correlate with itself (variance)

Question 12

for a portfolio is negative or positive correlation between different assets better

Answer 12

negative

Question 13

is the variance of the portfolio less than or more than the weighted average of the variances of the assets in the portfolio

Answer 13

less than

Question 14

what is a way to offer returns that will not be correlated with equity markets

Answer 14

hedge funds

Question 15

what makes diversification effective

Answer 15

risk of a diversified portfolio is less than the weighted average risk of assets

FREE LUNCH

Question 16

what correlation is the holy grail

Answer 16

-1

Question 17

a good efficienct frontier curves in which direction

Answer 17

north west