Exercises

1. What is the assumption behind don't put all your eggs in one basket?
2. What are the measures of risk?
3. How do you measure the co-moment between two stock returns?
4. Why it is argued that correlation is a better measure than covariance when we evaluate the co-movements between two stocks?
5. For two stocks A and B, with two pairs of (σA, σB) and (βA,βB), which pair is important when comparing their expected returns?
6. Is it true that variance and correlation of historical returns possess the same sign?
7. Find some inefficiency with the following code:

   import scipy as sp
   sigma1=0.02
   sigma2=0.05
   rho=-1
   n=1000
   portVar=10   # assign a big number
   tiny=1.0/n
   for i in sp.arange(n):
       w1=i*tiny
       w2=1-w1
       var=w1**2*sigma1**2 +w2**2*sigma2**2+2*w1*w2*rho*sigma1*sigma2
       if(var<portVar):
           portVar=var
           finalW1=w1
       #print(vol)
   print("min vol=",sp.sqrt(portVar), "w1=",finalW1)

8. For a given set of σA, σB, and correlation...