1 of 2 FINC 463 - Case Studies in Finance 2021-2022 Group Project 3 Portfolio Risk and Diversification This case study explores how diversification benefit can be achieved in portfolio management. To apply risk measures, you will examine how portfolio volatility is impacted by inclusion of new assets. Some of the key elements are outlined below. Beta The beta of a stock is a representation of how the stock moves with the broader equity market. When the broad equity market goes up or down by one percent, stock of interest will rise or fall by beta percent. Low beta stocks, between 0.5 and 0.8. tend to be defensive. They do not rise much when the market rises, but they also do not fall significantly when the market falls. Technically, we define beta as the slope coefficient Expected return of the market The expected return of the market is a general observation. In reality, no one knows by what degree the stock market will rise or fall over the next year. Nevertheless, in order to assess an individual stock we must have a view on where the broader market is heading. The expected return of the market is the same for every stock. In the project, we approximate market by SP500. Risk-free rate The risk-free rate is the U.S. government bond. A U.S. bond's yield is considered risk free because U.S. has not and is not expected to default 1 of 2 FINC 463 - Case Studies in Finance 2021-2022 Group Project 3 Portfolio Risk and Diversification This case study explores how diversification benefit can be achieved in portfolio management. To apply risk measures, you will examine how portfolio volatility is impacted by inclusion of new assets. Some of the key elements are outlined below. Beta The beta of a stock is a representation of how the stock moves with the broader equity market. When the broad equity market goes up or down by one percent, stock of interest will rise or fall by beta percent. Low beta stocks, between 0.5 and 0.8. tend to be defensive. They do not rise much when the market rises, but they also do not fall significantly when the market falls. Technically, we define beta as the slope coefficient Expected return of the market The expected return of the market is a general observation. In reality, no one knows by what degree the stock market will rise or fall over the next year. Nevertheless, in order to assess an individual stock we must have a view on where the broader market is heading. The expected return of the market is the same for every stock. In the project, we approximate market by SP500. Risk-free rate The risk-free rate is the U.S. government bond. A U.S. bond's yield is considered risk free because U.S. has not and is not expected to default