Corporate Finance : Question & Answer

Running head: CORPORATE FINANCE 1
Corporate Finance
Window User
3/10/2020

CORPORATE FINANCE 2
Question 1
The share risk is determined by its variability-the more the return of a stock is excluded from the
norm, the more volatile the stocks are and therefore should earn you higher returns. The
individual usually work in finances with lognormal distribution (lognormal as stock pricing is
floored at zero), and when stock prices (X), it implies that Y= ln(X) is normally distributed. The
typical market reversal is now based on the average and risk / volatility is calculated far from the
average by standard deviation1.
Question 2
In the form of a standard deviation of the variance in real portfolio returns over time, Portfolio
Risks like estimating the risk of individual investments can be calculated. This rendering
volatility is associated with the risk of the portfolio and can be quantified by the standard
deviation of this variability calculation. A quantitative statistic calculation of the adjustment to
the average of all returns from individual returns is a standard deviation as applied to investment
returns. One standard difference is the average sample variance2.
Therefore, the more the standard deviation, the higher the risk
For 2stock portfolio:
1 Jocelyn Hafer and Katherine A. Boyer. "Age related differences in segment coordination and its variability during
gait." (2018) 62 Gait & posture : 92-98
2 Mahdieh Arian. . "Practical calculation of mean, pooled variance, variance, and standard deviation, in meta-
analysis studies." (2020) Nursing Practice Today

CORPORATE FINANCE 3
Normal portfolio variance= sqrt[weight of ^2*standard deviation from B^2+weight*standard
deviation from B^2 + 2*correlation coefficient*standard deviation from A*standard deviation
from A-weight*of B].
From above, if the coefficient of association is + 1: portfolio baseline = weight A * standard
deviation A + weight B * standard deviation B.
Furthermore, If the coefficient of association is -1: regular portfolio deviation = weight of
A*standard A-weight variance of B*standard B deviation.
And other examples of the equation of correlation: standard deviation of the A * standard
deviation of A + B * standard deviation of B portfolio.
It is not an added risk, however reduces for all coefficients <1. This may also be extrapolated
into n inventories and applies for increasing of the cases.
So, it will reduce the risk if we are able to add fund inventories that are not ideally associated.
The returns would not be impacted, i.e. A*returns of A+weight of B*returns, in any event.
For instance, large-scale reciprocal funds usually have a high positive correlation with the S&P
500 Index, which is very close to 1. There is a positive correlation of small cap stocks to that
same index but it's not as high – usually about 0.8.
Question 3
In order to analyze the equation, it has been found that when one of the investments is risk-free,
so the risk will be no longer increased and thus the standard deviation will be zero3.
The equation is restricted to the risky asset since the usual variance from zero is equal to zero in
the second and third terms.
3 Andrus Salupere and Mart Ratas. "On the application of 2D discrete spectral analysis in case of the KP
equation." (2018) 93 Mechanics Research Communications 141-147.