Flashcards in Week 14 - Workshop Questions Deck (17)

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1

## How do you calculate the average return of a ‘Single Stock’?

### Sum the returns in all years and then divide by the number of years.

2

## How to calculate the ‘Volatility’ or ‘Standard Deviation’ of a single stock?

### Enter the data into calculate and the Sx value is the standard deviation of the stock.

3

## What is the formula for calculating the Co-Variance between two stocks?

###
(Actual return of stock A - Average return of stock A)’x (Actual return of B - Average return of stock B)’ /n

Each bracket is squared

4

## What is the formula for calculating the ‘Correlation’ between two stocks?

### [Covariance/ SD(a) x SD (b)]

5

## How do you calculate the ‘Standard Deviation’ of a portfolio of 2 stocks given the percentages of which Stock A and Stock B contribute to the portfolio whole?

###
W1’x SD1’ + W2’x SD2’ + 2 x W1 xW2 xSD1 xSD2 xCorrelation’ (raised to 1/2)

(All raised to 1/2)

6

## How to calculate the ‘Expected Return’ of a 3 stock portfolio given the weighting of each stock?

### (W1xER1) + (W2xER2) + (W3xER3)

7

## What does ‘Shorting a positive correlation’ lead to?

### Lower risk

8

## What is a ‘Sharpe Ratio’?

### The ‘Sharpe Ratio’ measures the reward (excess return) to risk (volatility) of a portfolio.

9

## How is the ‘Sharpe Ratio’ calculated?

### Expected Return - Risk Free Rate / Volatility

10

## When is the ‘Sharpe Ratio’ useful?

###
When the risk preferences of an investor is not known.

It provides an easy comparison between different investments.

11

## How do you find the ‘Beta’ of a stock in relation to the market?

### Correlation with market x Volatility of stock/ Volatility of market

12

## What is the ‘Beta’ of a stock?

###
The ‘Beta’ of a stock is a measure of the relationship between a stocks volatility and the volatility of the general market.

For example,

Does a stock go up when the market goes up?

Does a stock go down when the market goes down?

Does a stock go up when the market goes down?

Does a stock go down when the market goes up?

13

## What is the formula for calculating the ‘Expected Return’ from the Beta of a stock?

###
Expected return =

Risk Free Rate (RFR) + Beta (B) X (Market expected Rate - Risk Free Rate (RFR)

RFR, Market Expected Rate are given as integers!

14

## How do you calculate the ‘Next best alternative investment’ given the current investments Volatility, the Risk Free Rate, the Market Expected return and the Market Volatility?

###
The calculation for the next best alternative investment is:

ER = RFR + ‘x’ (Market expected return - RFR)

The sum of this then gives the rate at which capital should be multiplied.

15

## How do you calculate the volatility of the next best alternative investment?

### SDx (Rm)

16

## What does ‘ERm-RFR’ equal?

### The market risk premium

17