L3

Quick Notes

• sharpe ratio = returns / risk
  • take risk free returns = 0
• beta coefficient $\beta$ = cov(R, R_m) / Var(R_m)
  • volatility against a benchmark
  • percent allocation * beta → volatility
• $R_i=\beta \ast R_m$
  • LHS != RHS → $\alpha$
• alpha coefficient $\alpha$
  • performance over the benchmark
  • $R-\beta \ast R_m$
• correlation
  • eg. if 2 stocks moving together, why not invest all in the better one
  • if correlated, minimising of sigma doesnt work