L4 - Intro to Risk & Return

Question 1

What are the two components of percentage returns?

Answer 1

Dividend Yield and Capital Gains Yield

Question 2

How is dividend Yield calculated?

Answer 2

= DIVt / Pt -1

Question 3

How is capital gain calculated?

Answer 3

= Pt - Pt -1 / Pt -1

Question 4

What is risk premium?

Answer 4

The return on a risky asset less the return on the risk-free secruity

Question 5

Define covariance of returns

Answer 5

Measures how two assets are related

Question 6

What is the range of values for the correlation coefficient/

Answer 6

(-1,+1)

Question 7

What does a correlation coefficient of +1 indicate?

Answer 7

Assets are perfectly correlated

Question 8

How does correlation affect portfolio volitality?

Answer 8

The lower the correlation, the lower the volitality we can obtain

Question 9

What is systematic risk?

Answer 9

Risk factors which affect a large number of assets

Question 10

Give some examples of systematic risk

Answer 10

• Changes in GDP
• Inflation
• Interest rates

Question 11

What is unsystematic risk?

Answer 11

Risk factors which affect a limited number of assets

Question 12

Examples of unsystematic risk:

Answer 12

• Employee strikes
• Part shortages et.c