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Finanças

Finanças. October 31. Topics covered. Expected return Variance, standard deviation Covariance Correlation Portfolio: return and risk. Previously. NPV: find appropriate discount rate The discount rate is related to the risk level of the project

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Finanças

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  1. Finanças October 31 Qdai for FENUL

  2. Topics covered • Expected return • Variance, standard deviation • Covariance • Correlation • Portfolio: return and risk Qdai for FENUL

  3. Previously • NPV: find appropriate discount rate • The discount rate is related to the risk level of the project • Measure the risk level with standard deviation. • This class: the relationship between risk and return. Qdai for FENUL

  4. Individual securities • Expected return: The return that an individual expects a stock to earn over the next period. Qdai for FENUL

  5. Individual securities • Variance and Standard Deviation: the volatility of a stock’s return • Covariance and Correlation: the interrelationship between two securities Qdai for FENUL

  6. Expected return and Variance Qdai for FENUL

  7. Covariance and Correlation Qdai for FENUL

  8. Portfolio: expected return • Expected return of a portfolio: the weighted average of the expected returns on the individual securities • Example. RA=17.5% RB=5.5% Expected return on portfolio = • If invest $60 in A and $40 in B, then Expected return on portfolio = Qdai for FENUL

  9. Portfolio: variance • Variance of a portofolio Var(portfolio)= Qdai for FENUL

  10. Portfolio: variance • The variance of a portofolio depends on • For given variances of securities, a positive relationship (covariance) the variance of the portfolio • A negative relationship (covariance) the portfolio variance. Qdai for FENUL

  11. Portfolio: variance Example: XA=60%, XB=40%, = 0.066875, = 0.013225, Cov (A,B)=-0.004875 Qdai for FENUL

  12. Portoflio: variance • The matrix approach Qdai for FENUL

  13. Portfolio: Standard Deviation • Standard deviation of a portfolio = SD(portfolio) • In the previous example, var(portfolio)=0.023851 • SD(portfolio) = Qdai for FENUL

  14. Portfolio: diversification effect Qdai for FENUL

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