SMG FE 323 Chapter Notes - Chapter Ch. 12: Dow Jones Industrial Average, S&P 500 Index, Capital Asset Pricing Model

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Fe323 chapter 12 systematic risk and the equity. Expected portfolio return the weighted average of the expected returns of the investments within it, using the portfolio weights. The total risk measured as standard deviation, of the portfolio. First, by combining stocks into a portfolio, we reduce risk through diversification. Second, the amount of risk that is eliminated in a portfolio depends upon the degree to which the stocks face common risks and move together. Correlation is a barometer of the degree to which the returns share common risk. (-1 to +1) o(cid:396) the deg(cid:396)ee to (cid:449)hi(cid:272)h the sto(cid:272)ks" (cid:396)etu(cid:396)(cid:374) (cid:373)o(cid:448)e together. The expected return of a portfolio is equal to the weighted average expected return of its stock, but the volatility of a portfolio is less than the weighted average volatility. As a result, it is clear that we can eliminate some volatility by diversifying. Equally weighted portfolio same amount of money is invested in each stock.

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