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RISK:
Variability or uncertainty is one of the many ways and to calculate it we find the
standard deviation and typically used in relative terms.
Markowitz: variability. Find arithmetic mean and standard deviation.
Beta: used in capital asset pricing model (CAPM)
Measure of relative risk but not like SD it means how much an asset fluctuate
relative to a market. The reference value is 1. A market with Beta 1 may go up or
down as the market goes up. On an average, it is supposed to move as per the
market.. not necessarily always. Beta shows the volatility of the market. Widely
and publicly available.
A portfolio in terms of asset one and asset two; the return of a portfolio in any
given period is equal to the weighted average return of each asset in the
portfolio. If you diversify your portfolio between asset 1 and asset 2, it appears
that the return of the combination is steady even when there is quite a bit of
variability in the original assets.
When we combine asset 1 and 3 (at 50%), that gives a very fluctuating portfolio.
We need to see correlation coefficient to understand
Correlation coefficient:
Rho: measures the sign and strength of the relationship between two variables
it could be two assets.
Can be between -1 and 1.. can be strong or weak.. but mostly will be positive