15 - Portfolio Approach

Question 1

What is the formula for Rate of Return?

Answer 1

Return % =

(Cash Flow + (End Value - Start Value)) / Start Value x 100

Question 2

What is ex-ante vs ex-post?

Answer 2

Ex-ante = projection of expected returns
Ex-post = past / historical returns

Question 3

What are seven types of risk in the market?

Answer 3

1. Inflation
2. Business
3. Political
4. Liquidity
5. Interest
6. FX
7. Default

Question 4

What is systematic risk?

Answer 4

Cannot be eliminated via diversification as these risks affect all assets in certain classes. (Inherent to any capital market)

Question 5

What is specific or non-systemic risk!?

Answer 5

The risk that 1 or a group of securities will change in price differently than the overall market.

Question 6

What three statistical measures are used to quantify the risk of a security?

Answer 6

1. Variance
2. Standard Dev (sqrt of var)
3. Beta (compares risk back to the market)

Question 7

How do you calculate the return on a portfolio?

Answer 7

Multiply the return of each security by its initial % weighting of the portfolio. (Subtract inflation rate to get real rate)

Question 8

What effect does having positively or negatively correlated stocks have on a portfolio’s risk?

Answer 8

Positive correlation doesn’t reduce risk, while negative correlation does (when one stock goes down, the other may go up).

Question 9

How many stocks can there be in a portfolio until adding new ones does not reduce risk anymore?

Answer 9

32

Question 10

What is alpha vs beta?

Answer 10

Beta = the change in price is based on stock market fluctuations 
Alpha = the additional movement in a portfolio's return based on the manager's skill.

Question 11

What are the 6 steps of the portfolio management process?

Answer 11

1. Determine objectives/constraints
2. Design invest policy stmnt
3. Form asset alloc strat &invst style
4. Implement asset alloc
5. Monitor economy/markets/portfolio/client
6. Evaluate portfolio performance

Question 12

What are the three primary and two secondary objectives of investors?

Answer 12

1. Safety of principal
2. Income
3. Growth of capital
   - –
4. Liquidity (marketability)
5. Tax minimization

Question 13

What is an IPS, and what does it contain?

Answer 13

Investment Policy Statement forms the basis of the agreement between manager an client.
Contains invest objectives, asset mix, guidelines, list of acceptable vs prohibited securities, method of perf appraisal.