l13&14 : risk & evaluation

Question 1

what is expected return?

Answer 1

the return you expect to receive on average. aka investors required return

Question 2

what is the formula to calculate actual return?

Answer 2

expected return + unexpected return

Question 3

what is a portfolio weight?

Answer 3

the proportion of total investment that goes into each share. can be uniform or non-uniform

Question 4

what does the expected return of a portfolio also equal?

Answer 4

the weighted average of the constituent security expected returns

Question 5

what are the two types of risk?

Answer 5

systematic non-diversifiable market
unsystematic diversifiable market

Question 6

what are possible sources of a systematic risk?

Answer 6

information surprises about inflation, interest rates, industrial productivity etc.
can potentially affect many securities to various extents.

Question 7

what are possible sources of an unsystematic risk?

Answer 7

information surprised about drug discoveries, corporate boardroom problems, takeover bids, acquisition threats.
can affect individual or small groups of securities.

Question 8

what is the systematic risk principle?

Answer 8

when investors require higher expected return to compensate them for systematic risk (risk inherent to the whole market). high risk, high return.

Question 9

why is portfolio diversification beneficial in terms of risk?

Answer 9

eliminates unsystematic risk since securities aren’t concentrated in one company / group / industry. leaves only systematic risk.