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Finanças

This overview covers essential concepts in finance focusing on expected return, variance, standard deviation, covariance, and correlation in the context of portfolios. Learn how to calculate expected returns for individual securities and portfolios, incorporate the discount rate related to risk levels, and measure overall portfolio variance. The discussion includes the significance of diversification and how these elements interact to affect investment strategies. Gain insights into managing risk while maximizing returns through a better understanding of these financial metrics.

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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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