In: Finance
Correlation coefficient is ratio obtained from covariance of
assets divided by the multiplication of standard deviation of
asset. Higher the correlation more closely is the return on of 2
assets are related.
Diversification is the benefit obtained by choosing a portfolio
with negative correlation and reducing unsystematic risk.
Systematic risk is the non diversifiable economic risk affecting
the entire economy and all industries like interest rate and
inflation whereas unsystematic risk is the diversifiable risk which
can be reduced by choosing negatively correlated stocks in the
portfolio.
Risk premium is the excess return of portfolio over the risk free
rate.
Beta is the relation of risk premium of portfolio and risk premium
of market. It is obtained by taking the covariance of stock
and market return divided by variance of market.
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