Portfolio Standard Deviation
The standard deviation of a portfolio of assets, or portfolio risk, is simply not the sum of the risk of the underlying securities. Due to the correlation between securities, the computation of portfolio risk must incorporate this correlation relationship. Computing…
Risk Aversion
Risk aversion is related to investor behavior. Some investors are more comfortable with uncertainty in the outcome than others and are prepared to tolerate more risk in the pursuit of greater portfolio returns. Risk Seeking Risk seekers actively pursue risk…
Mean, Variance and Covariance
The computation of mean, variance, and covariance statistics allows portfolio managers to compare the underlying securities’ return-risk characteristics and potential portfolio impact. These metrics are quantitatively determined and rely on historical price or return data. While we can compute the…
Dividends
When a company pays dividends to its shareholders, it is giving them a portion of its earnings. The amount that is paid to each shareholder is dependent on the number of shares that they own. Indeed, the payout and is…
Operating Breakeven Quantity of Sales
The breakeven quantity of sales or just simply breakeven point indicates the number of units of a company’s product that is produced and sold at which point the company’s net income becomes zero. Similarly, we can specify the breakeven point…
Breakeven Quantity of Sales
“Breakeven point” or “breakeven quantity of sales” refers to the number of units of a company’s product that is produced and sold at which point the company’s net income becomes zero. Computing Breakeven Quantity of Sales At the point where…
Effect of Financial Leverage on Net Income and ROE
Financial leverage refers to the extent to which a company finances its operations using fixed-cost financial obligations such as debt and preferred equity. The more a company uses debt financing, the higher its financial leverage and exposure to financial risk….
DOL, DFL and DTL
The Degree of Operating Leverage, Degree of Financial Leverage, and Degree of Total Leverage are three important ratios that help us to quantify a company’s exposure to operational risk, financial risk, and a combination of the two, respectively. Degree of…
Business, Sales, Operating Risk, and Financial Risks
Risk can be defined in several ways. However, one fairly simple definition is, “risk refers to the uncertainty of a return and the potential for financial loss.” Risk can arise from both financing and operating activities and can be classified…
Asset Class Characteristics
All asset classes have risk and return characteristics. Historical returns are neither forward-looking nor expected returns. Nevertheless, it is noteworthy that by examining the performance of the historical returns, we can understand the likely characteristics of a particular asset class….
