correlation between the return on stock A (Ra) and stock B (Rb) is:
corr (Ra, Rb) = cov(Ra, Rb)/ SD(Ra)-SD(Rb)
a measure ranging from -∞ to ∞ that reflects the tendency of 2 things to move together or opposite. Correlation is just covariance scaled to be between -1 and 1 and not have units
the portfolio of all shares outstanding of every security -contains only systematic risk since all firm specific risk is diversified away
Market Portfolio Proxy
a portfolio whose return tracks the true market portfolio. Indexes are typically used
indicator that reports the value of a particular set of securities -Most well known: dow jones industrial average (DJIA), S&P 500, NASDAQ Composite -Most used as market proxy S&P 500
Measuring Systematic Risk-Intuition
If a systematic/market-wide event happens, the market portfolio will change (possibly a lot). If an individual stock's return doesn't change much during this time, it must have low systematic risk (low exposure to systematic events(
Stocks with returns highly correlated with the market portfolio returns must..
have high systematic risk
A stock whose returns move opposite the market's...
would reduce a portfolio's systematic risk when added, because it would do well when negative events occur (a stock that does well in recessions should have low systematic risk)