Financal markets and trading test

Portfolio Construction

Chasing higher returns usually means accepting higher risk. Risk isn’t one thing—it shows up as concentration risk, downside risk, volatility (σ), beta, and value-at-risk (VaR).

Concentration Risk (“all eggs in one basket”)

When too much money is in one stock/sector/asset, one bad outcome can wreck the whole portfolio.

Downside Risk

Risk focused on losses (the “how bad can it get?” side), not just up-and-down movement.

Volatility (σ)

How much returns swing around their average.

Bigger σ

= more uncertainty in the return path.

Related slide idea:

“Stock return paths” can look “Low Risk” (tight swings) or “High Risk” (wild swings). “Volatility (Sigma)!”

Beta (β)

Measures how sensitive a stock is to market moves (market = S&P 500 / SPY)

β = 1

→ moves like the market

β = 0.5

→ less sensitive than market

β = 1.5

→ more sensitive than market

Value-at-Risk (VaR)

A risk measure that summarizes potential loss under a probability/confidence level concept (listed as a key risk item in the notes).

What do you do first for return & volatility on a stock?

Stock Return & Volatility Setup
Choose your favorite stock

• Download its price series for the last 1 year

• Calculate daily returns RtRt​

Average Return (annualized)

• Compute mean of daily returns: R′R′

• Annualize: multiply by 252

Annualized mean return ≈ 252⋅R′

Daily Variance of Returns

Use the variance formula (or Excel built-in Var function).

Variance definition given: σ^2 = 1/T​∑(R_t​ −R′)^2

Where R′ is the mean of the returns series.

Scaling Risk to Annual