QM 6 – Portfolio Expected Return and ris · Flashcards

Question

What extra term in the two-asset portfolio variance formula captures diversification effects?

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Answer

The covariance term: $2 w_{1} w_{2} ρ_{12} σ_{1} σ_{2}$ .

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Question

What does Roy's safety-first ratio measure in portfolio selection?

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Answer

Excess expected return above a threshold per unit of risk.

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Question

What does Roy's safety-first ratio measure in portfolio selection?

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Answer

Return above the minimum acceptable return per unit of risk.

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Question

How is covariance from joint probabilities calculated across states of the world?

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Answer

$\sum P (s) [R_{i} - E (R_{i})] [R_{j} - E (R_{j})]$ .

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