Answer the following: What is a portfolio? What is diversification? What is corr
ID: 2785793 • Letter: A
Question
Answer the following:
What is a portfolio?
What is diversification?
What is correlation coefficient between stocks?
How can we achieve diversification in stock investments?
What is investment return?
What is coefficient variation? How to interpret CV?
How to measure a stock’s expected rate of return, requirement rate of return, and risk?
What is CAPM/SML?
Given additional inflation, how would SML change?
If investors are risk adverse, how would SML change?
What is market equilibrium for stock price? Market price vs intrinsic value.
What is market risk premium?
What is stock Beta? How beta is measured? How to interpret Beta?
What is stand-alone risk?
What are components of stand-alone risk? There are many different name for firm-level and market-level risk. What do them mean?
What is efficient market hypothesis and its three forms? How efficient market hypothesis works?
What is bond? US treasury bond? Corporate bond?
Why company issue bond?
What is credit rating? What factors affect credit rating?
What are types of bank debt? Types of corporate bonds? Zero coupon bond?
What are four key relationships about Bond?
What are key components about bond?
What is YTM? YTC? Current yield? Capital gain yield?
What is callable bond? Sinking fund? Convertible bond?
What is term structure of interest rate? What are key components of term structure of interest rate?
What is bond spread? Default risk premium? Liquidity premium? Maturity risk premium?
What is reinvestment risk?
Explanation / Answer
Answer 1)
What is a Portfolio ?
Portfolio is a grouping of financial assets that an investor is interested in investing in order to achieve his/her financial goals. These financial assets could of different types like stocks, bonds , etfs. mutual funds etc. Depending upon the puropse of the investment these financial assets are kept in the porfolio
Answer 2)
What is diversification ?
Diversification is a methord of porfolio management in which a investment manager or investor manages the unsystematic risk of the porfolio by mixing different types of assets together. Doing this safe guards the overall investment return of the porfolio. Usually assest which are uncorrelated are mixed together to acheive the highest diversification benefit.
Answer 3)
What is correlation coefficient between Stocks?
Correlation measure the relationship between different stocks . In other words how the stocks would behave with respect to each other. If two stocks are behave in the same way when market goes up or down then we would say these are positive correlated. i.e their reaction to the market situation is same.Coefficient of Correlation is the statistical measure that measures correlation between stocks. In order to acheive diversification benefits we need to have uncorrelated stocks in the portfolio.
Answer 4)
How can we achieve diversification in stock investments?
Diversification can be acheived by having stocks which are negatively correlated with each other in thr porfolio. This would diversify the portfolio risk and limit the downside risk of the porfolio.
Answer 5)
What is investment return?
It is the gain or loss generated by an investor when he investments a particular sum of money on an investment.
We can calculate the return on investment as :-
(Ending value of investment - Vlaue of investment when bought) / Value of investment when bought
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