BU283 Chapter Notes - Chapter 5: Modern Portfolio Theory, Cash Flow, Trading Strategy
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If this region suffers a recession, sunbeam will also suffer, but it"s very hard to predict exactly how large the effect will be: the point is that risk: 5. 2 calculate the expected return on a single asset. 5. 3 compute the risk of holding a single asset. 5. 4 determine the expected return for a portfolio of assets. 5. 1 correlation: correlation means there"s a predictable relationship between two series of numbers, this relationship is measured by the correlation coefficient, r, perfectly negatively correlated: when one moves up, the other moves down, correlation coefficient = -1. 0. Perfectly positively correlation: both returns move in exactly the same direction at all times: correlation coefficient = 1. Most securities have positively correlated returns but not perfectly positively correlated returns. Correlation has a big impact on the risk investors realize. This provides financial incentives for them to diversify.