MAF101 Lecture Notes - Lecture 7: Risk-Free Interest Rate, Systematic Risk, Bachelor Of Business Administration
Document Summary
Portfolio = collection of assets an investor owns. Di(cid:448)ersifi(cid:272)atio(cid:374) = a strategy of redu(cid:272)i(cid:374)g risk (cid:271)y i(cid:374)(cid:448)esti(cid:374)g i(cid:374) 2 or (cid:373)ore assets (cid:449)hose (cid:448)alues do(cid:374)(cid:859)t always move in the same direction at the same time. Benefit of diversification = by investing in 2 or more assets whose returns do not always move in the same direction at the same time, investors can reduce the risk of their portfolio without reducing returns as much. Holding a portfolio of shares allows a reduction in investment risk because: Poor returns on some stocks are offset by stronger returns on others. The o(cid:448)erall portfolio retur(cid:374) is (cid:858)s(cid:373)oothed(cid:859) out i. e. is less volatile or less risky. Portfolio risk: the risk of a portfolio is lower than the weighted average risk of its constituents. 3 factors determine the risk standard deviation) of a portfolio: standard deviation of constituents, weights of constituents, covariance/correlation between return on constituents. Positive = two events/series move in the same direction.
