Risk Total risk: unsystematic risk systematic risk unique risk market risk diversifiable risk non-diversifiable risk
Risk Total risk: = unsystematic risk + systematic risk = unique risk + market risk = diversifiable risk + non-diversifiable risk
Expected Return-Single asset X Pr
Expected Return - Single Asset n i=1 i Pri k = k
Risk- Single asset k:-k)×P k -k O,=111=1 n-1
Risk - Single Asset ( ) = = n i 1 i 2 k ki - k Pr ( ) n -1 k - k n i 1 2 i k = =
Expected Return risk of a Portfolio w:× k p Ok,=wiO1+w202+2W,W252O, 02
Expected Return & Risk of a Portfolio n j =1 p j j k = w k 1 2 1,2 1 2 2 2 2 2 2 1 2 k 1 w w 2w w r p = + +
Correlation coefficient a measure of the relation between the returns on two securities Can be t or-or o Diversification is of greatest benefit in risk reduction when the correlation between the returns on the two securities is negative
Correlation Coefficient ◼ A measure of the relation between the returns on two securities. ◼ Can be + or - or 0. ◼ Diversification is of greatest benefit in risk reduction when the correlation between the returns on the two securities is negative