Tisk And Return Flashcards
What is the portfolio optimization problem
How to choose a portfolio to maximize utility
What are the assumptions in the portfolio optimization problem
Utility is an increasing function of money and the return of risky assets are normally distributing
What is the assumption about investors attitudes to risk
That they are risk averse
What is the aim of diversification
That certain assets in the portfolio cancel out each others risk
Does risk averse investors gain utility from diversifying
Yea
What is idiosyncratic risk
Risk for a particular asset
What risk remains after diversifying a portfolio
Market risk aka systematic risk
Do assets generally have a positive covariance
Yes
What is unsystematic risk
Idiosyncratic risk
Give some examples of idiosyncratic risk
Strikes or production problems
What is beta of an asset
The market risk of an asset which is calculated by the covariance of the asset and the market divided by the market variance
What is the market portfililio
The return of all assets that exist
What if an asset has a beta larger than one
Than the return of the asset will increase a lot when the market return increases. A rising tide lifts some boats more
What if an assets beta is between one and zero
Than it will increase more slowly than the market when the market increases
What if an assets beta is negative
Than the asset returns will move in the opposite direction to the market
