Risk And Return I

Question 1

Holding period return

Answer 1

[(1 + r ) (1 - r) … ] -1

Question 2

Annualized return in HPR function formula

Answer 2

Geometric mean of Holding Period Return

[(1+ HPR) ^ 1/n ] -1

Question 3

How to calculate Money Weighted Return? 3 steps

Answer 3

Consider all inflow and outflow

1. Identify inflows and outflow’s (be careful with dividends. If they are not reinvested, INFLOW)
2. Draw the flows

Net Cash Flows = CF0, CF1, CF2…

3. Calculate IRR

Question 4

Regarding Trading costs, liquidity is least like to affect

Answer 4

Brokerage commissions
(Fixed costs negotiated with brokerage firm)

Question 5

The relationship of risk aversion and risk return is negative, positive or neutral ?

Answer 5

Positive

Question 6

Utility Function and cofficient A analysis

Answer 6

U = E(r) - 1 A (desvPad) ^ 2
—-
2

U = utilities
E(r) = Expected return
A = measure of risk aversion
DesvPad ^ 2 = Variance of the investment

A > 0 —> risk aversion
A = 0 —> neutral
A < 0 —> Risk taker

Question 7

CAL - Capital Allocation Line
Formula
Considerations
(Rf)

Answer 7

E(Rp) = Rf + (E (ri) - Rf ) desvP
————————-
Desv i

Cal represent the ser of all feasible investments

PLOT Rf + Risky assets

Differents investors of differents risky assets, combining with RF must lie on CAL

Question 8

StndDev of portfolio formula

Answer 8

[(Wa )^2 x (DesvPad a ) ^2

Same for Asset B

+

2 WaWbDesvpadADesvpadB

ALL ^ 1/2

Question 9

Correlation = ? Formula

Answer 9

COV 1,2
————-
DesvP1 DesvP2

Question 10

Covariance formulas (2)

Answer 10

(R1 - Rbar) + (R2 - Rbar)
——————————-
N-1

Cov 1,2 = correl (std1) (std2)

Question 11

What is the value of correl (rô) of assets uncorrelated?

Answer 11

Zero

Question 12

Relation about Risk aversion and Indifference curve (slope)

Answer 12

More risk averse, more slope

Risk averse people need more return per unit of risk (greater slope)

Risk taker will not demand excessive return for risk

Question 13

Variance of equally weighted portfolio Formula:

(What happens to the contribution of individual asset for volatility if we ADD more assets)?

Answer 13

Vol^2 = vol avg^ 2 + N -1 (cov avg)
—————. ———
N. N

Contribution of each asset DECREASES

Contribution for COV AVG n CORREL INCREASE

Question 14

What is the efficient frontier?

Answer 14

All attainable risky assets
With
Highest expected return
For a given level of risk

Question 15

What are the Minimum Variance Frontier
And global minimum Variance portfolio:

Answer 15

Minimum Variance Frontier =

difference between Efficient frontier
and the surplus amount of risk

Global minimum variance portfolio =
1.“safest” portfolio of the frontier.
2. Bunda da Markowitz efficient frontier.
3. Left most off all portfolio risky

Question 16

What type of porfolio most fits with risk- neutral investor?

Answer 16

More return possible.

Remember: U = E(r) - 1/2 x A (zero) StdDev

So U = E(r)

Question 17

Why dominant CAL (Capital Allocation Line) has a Higher Rate of Return for levels of risky greater than
Optimal portfolio ?

Answer 17

Hability to borrow at the Rf rate
(i.e Buying on margin)

Question 18

Time weighted rate of return formula step by step ( look for the period. If are greater than 1, GEO MEAN)

Answer 18

1. Sub periods of adds or withdrawals (dividends, etc)
2. HPR for all subperiods

3.[( 1+HPr1 ) (1+HPRn) ] -1

ATTENTION

If the total investment period is greater than 1, geometric mean

Question 19

What is the name of The point which tangency the CAL and efficient frontier is:

Answer 19

Optimal Risky Portfolio

Question 20

Draw of the value of A and the risk profile (risk aversion) - term in Utility Formula-

(The A stands in the central)

Answer 20

Taker<————A ————> Averse
Neutral