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Flashcards in Risk And Return Deck (12)
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1

Expected return of an asset

Sum of (probabilities x associated return)

2

Variance of an asset

V = p1 x (r1 - ER)^2 + p2 x (r2-ER)^2

3

Standard deviation

Square root of an asset

Total risk of an asset

4

Covariance of two assets

Cov (A,B) = p1 x (rA1 - ERA) (rB1 -ERB) + p2 x (rA2 - ERA)(rB2 - ERB) + p3 x (rA3 -ERA)(rB3-ERB)

5

Corrélation of two assets

Cov (A,B) / (stand dev (A) x stand dev (B))

6

Expected return of a portfolio of two assets

ERp = w1 x ER1 + w2 x ER2

Weighted average

7

Variance of a portfolio of two assets

Var (p) = w1^2 x Var (1) + w2^2 x Var (2) + 2 x w1 x w2 x Cov (1,2)

8

Risk free asset

Rate of return fixed

Stand dev = 0

9

CAPM equation

ER = rF + B(i,m) x (ERm - rF)

rF : risk free rate
B(i,m) : beta : Systemic rik of the asset
ERm : expected return of the market

10

Market risk premium

ERm - rF

11

Systemic risk of an asset

B(i,m) = Cov (i,m) / Var (m)

12

Beta of a portfolio

B(p,m) = w1 B (1,m) + w2 B(2,m)