Investments Formula #4 Flashcards
(18 cards)
What is R squared?
It is the square of the correlation coefficient
What is a high R square in indication of?
A diversified portfolio
What is a low R squared an indication of?
A non-diversified portfolio
If the R square is greater than 60 what do you look for?
1 look for the highest positive alpha (Jensen)
What if alpha is not listed on an R square greater than 60?
Choose the highest Treynor number
True or false an R square greater than 60 you are more comfortable in a formula that uses beta
True
Why use alpha and trainer in an hour square that is greater than 60?
Because their formulas use beta
What does R square reveal?
R2 is the percentage of a funds movement that is explained by movements in the S&P 500. Index funds based on the S&P 500 (diversified) will have an R2 of very close to 100%. Sector funds (not diversified) will have a very low R squared
T or F
Because the Jensen ratio and the trainer ratio use beta to express risk, the portfolio must be diversified, (retaining systematic risk only ).
True
Why not use the Sharpe index on high R Square?
Because the Sharpe index uses Standard Deviation, presuming the portfolio is non-diversified and exposed to both systematic and systematic risk
What are the Alpha (Jensen)/Trainer keys
risk is measured in terms of beta
Volatility
Contain systematic risk
What are the sharp keys?
Risk is measured in terms of standard deviation
Variability
Contain systematic and un systematic risk (nondiversified)
What does R2 measure?
The degree to which the price movement of a mutual fund mirror is the actual market. In our square of 100 mirrors the movements of the S&P 500.
Which measure of R2 indicates a diversified portfolio?
An R2 greater than 60
Which measure of R2 indicates a nondiversified portfolio?
An R2 less than 60
Which formulas are effective only with the diversified portfolio?
Jensen/Alpha and Treynor
Why even care about R2?
Because it allows us to evaluate performance of a security or portfolio compared to the market to see if it’s worth it
Which formulas use beta?
Jensen/Alpha and Treynor
