Risk Aversion
Introduction Risk aversion is an investor’s preference for certainty over uncertainty. Risk-averse investors generally prefer investments that offer more predictable returns rather than accepting higher levels of risk for the possibility of greater rewards. In portfolio management, risk aversion influences…
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. Learn…
Uncorrelated Portfolio Holdings
The portfolio standard deviation, or risk, is not simply the addition of the risk of each portfolio holding. The interaction between portfolio holdings contributes to the overall portfolio risk. Correlation Correlation is a statistical measure of the relationship between two…
Minimum-Variance Portfolios
In theory, we could form a portfolio made up of all investable assets. However, this is not practical, and we must find a way to filter the investable universe. A risk-averse investor wants to find a combination of portfolio assets…
Optimal Portfolios
Introduction An optimal portfolio is the combination of investments that provides the highest expected utility for a given level of risk. Rather than simply maximizing returns, portfolio selection involves balancing expected returns with an investor’s willingness to accept uncertainty. Every…
Financial Reporting and Financial Statement Analysis
Financial reporting and financial statement analysis are two very important terminologies in finance. The two terms describe how a company’s financial performance is made known to persons outside the company and how this performance is assessed and used to make…
Financial Statements
The statement of financial position, statement of comprehensive income, statement of changes in equity, and statement of cash flows represent a complete set of financial statements. These statements can be used in financial statement analysis to evaluate a company’s performance…
The Financial Statement Notes
Financial statements are accompanied by financial statement notes and supplementary information that help the users of financial statements to understand the information that is reported. Importance of Financial Statement Notes and Supplementary Information Notes to the financial statements provide important…
Audits of Financial Statements
Annual reports present financial statements that have been audited by an independent accounting firm. Auditing of financial statements is an important function that is performed under specified auditing standards and which may be required by law, regulation, or some form…
Other Information Sources
To get a fairly accurate picture of a company’s financial position and financial performance, analysts tend to base their financial statement analysis on the company’s audited, annual financial statements. The audit of the annual financial statements, in this case, must…
