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ADM2350 (26)
Lecture 7

ADM2350 Lecture 7: Untitled7

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Anna Dodonova

Correlation Coefficient —> Measures the tendency of two variables to move together —> The estimate of correlation from a sample of historical data is often called “R.” Diversification —> can substantially reduce the variability of returns without an equivalent reduction in expected returns The effect of diversification: a. Unsystematic (“asset-specific”) risk will significantly diminish in large portfolios. b. Systematic (“market”) risk cannot be eliminated by diversification since it affects all assets in any large portfolio. beta of a portfolio is a weighted average of its individual securities’ betas Chapter 6 (yes, we went back) bond = a long-term contract between a borrower and its lenders/bondholders e.g, find price of a 2 year bond, with coupon rate = 8% paid semiannually, if FV = 1000 and yield to maturity (APR) is 10% SOL: r6motns = 5% n = 2 semiannually * 2 year = 4 [40* (1 - (1/ ((1 + 0.05)^4)))] / 0.05* 1000/(1.05^4) Par value: Face value; paid at maturity; assume $1,000 Coupon interest rate: Stated interest rate; multiply by par value to get dollars of interest; generally fixed but can vary Maturity: Years until bond must be repaid; declines Issue date: Date when bond was issued
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