Risk and Diversification

10-4 Risk and Diversification ? variegation (???) ? SDs of returns on 10 well-known companies ( parry 10-6): 108.5% ~ 17.8% rootSD (%) Amazon.com108.5 Dell Computer54.5 Ford38.1 Delta Airlines33.9 Pfizer28.6 General Electric28.3 McDonalds26.9 PepsiCo26.4 H.J. Heinz24.6 ExxonMobil17.8 ? Do these SDs in the tabularize look high to you? The commercialize indexs ( trade portfolios) SD was almost 20% over the 1900 2001 stop of these soul gunstocks, only wizard had a SD of slight than 20%. an main(prenominal) question: The market portfolio is made up of individual stocks, so why isnt its variation(??) equal to the average variability of its components? answer: Diversification reduces variability. ? character of diversification: diversifying your investment crossways the 2 businesses in interchange umbrellas and selling ice cream ? points: Portfolio diversification reduces lay on th e line because prices of several(predicate) stocks do not move precisely together. not sorrowful exactly together: Statisticians say that stock price changes (stock returns) be less than perfectly correlated. That is, the correlation of returns among stocks x and y is less than 1 ([pic]).

Diversification works best when the returns are negatively correlated ([pic]) ? individual summation risk versus portfolio risk ? an important point: The history of return on different asset classes (i.e., different portfolios) provides compelling(??????????) evidence of a risk-return trade-off(?? ??????????????) and suggests that the SD of ! the judge of return on each asset class (portfolio) is a useful pecker of risk. However, the SD of returns can be a lead measure of risk for an individual asset. ? example in Table 10-7: Return onReturn on Scenario (?????)Prob.Auto Stock(%)Gold Stcok(%) fadeout1/3-8+20 Normal...If you want to get a wide-cut essay, stray it on our website: OrderCustomPaper.com

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