Lesson 1262 of 1524
How to Think about Investing
As investors hold multiple assets in a portfolio, they are able to eliminate firm-specific risk.
Practice this chapterAs investors hold multiple assets in a portfolio, they are able to eliminate firm-specific risk. The return to a portfolio is measured by the arithmetic average, and the risk is measured by the standard deviation of the returns of the portfolio.
The risk of the portfolio will be lower than the weighted average of the risk of the individual securities because the returns of the securities are not perfectly correlated. However, systematic or market risk remains, even if an investor holds the market portfolio.
return to a portfolio — measured by the arithmetic average, and the risk is measured by the standard deviation of the returns of the portfolio. firm-specific risk — the risk that an event may impact the expected revenue or costs of a firm, thereby impacting the returns to investors; also known as diversifiable risk. risk — measured by the standard deviation of returns. portfolio — a collection of owned stocks.
Worked example
What does “return to a portfolio” mean in How to Think about Investing?
- 1Use the wording this chapter gives for return to a portfolio.
- 2The book says: measured by the arithmetic average, and the risk is measured by the standard deviation of the returns of the portfolio.
- 3Do not use the meaning of firm-specific risk. That term means the risk that an event may impact the expected revenue or costs of a firm, thereby impacting the returns to investors; also known as diversifiable risk.
Result: measured by the arithmetic average, and the risk is measured by the standard deviation of the returns of the portfolio
Why. That is the meaning this chapter gives for return to a portfolio.
Do not swap return to a portfolio and firm-specific risk. return to a portfolio means measured by the arithmetic average, and the risk is measured by the standard deviation of the returns of the portfolio. firm-specific risk means the risk that an event may impact the expected revenue or costs of a firm, thereby impacting the returns to investors; also known as diversifiable risk.
Practice margin
This chapter
A fresh set from this chapter only. Choose 10 or 20. Multiple choice and fill-in, with no repeat inside the set.