Class #18: Tuesday November 10, 2009

The new section, called risk and diversification examines risk both from a conceptual side and a computation side.  The computations you'll be asked to perform will require descriptive statistics, mainly expected value, variance, standard deviation, covariance, and correlation.  Some students find this section to be the most challenging in the course.  Factor this into the time you plan to devote to the course!

The learning goals in this section are as follows:

• What is risk and how does risk get factored into my decision making?
• How can risk be measured for single assets?
• Why does diversification act to reduce risk?
• How can portfolio theory help produce a relationship between risk and return.

Today's class will illustrate the calculation of variance, standard deviation, and perhaps covariance and correlation.  The numbers come from the George and Kramer example in the course notes.  If you'd like to see a spreadsheet illustration of this example, click here.