Exhibit 4 Reading 41


I’m examining exhibit 4 and its observations. The books say:

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I don’t understand the first sentence.


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Am I interpreting the second sentence correctly? If we pick a stock at random each quarter, record its return then do this for all subsequent quarters and if you run this experiment many times, you will get an annualised return of 15.1% and a sd of 24.9%?

3.) Finally, I don’t understand the heuristics used to come to this conclusion, to me this doesn’t seem apparent/obvious:

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(Institute 239)

Institute, CFA. 2016 CFA Level I Volume 4 Corporate Finance and Portfolio Management. CFA Institute, 07/2015. VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.

Suppose that you have three stocks: A, B, and C. If you expect that history will repeat itself, then you can use that information to guide your stock selection each quarter (e.g., if A’s return has been higher than B’s return with the same volatility, you’ll choose A instead of B). If you have no reason to believe that history will repeat itself, then you have no information to bias your selection: whatever you choose, on average, will be the same as choosing the stocks randomly.

It says that that’s what your expected return and standard deviation of returns are. What you actually get could be much different. Just as with rolling a fair die: your expected value is 3½, but, for whatever reason, you never _ actually roll _ a 3½.

All they’re saying is that the standard deviation of returns of a portfolio is not the weighted average of the standard deviations of the constituent securities: there’s a diversification benefit.

Ah it’s one of those complify simplicated situations. I’m doing the opposite. Just need to use the simple arithmetic average. I’m taking it in a whole nother direction. I think I need to review independence and dependence, I have a feeling I don’t understand basic maths.