3 Strategies Flashcards
Capital Asset Pricing Model (CAPM)
- evaluate security to determine if it should be included in a portfolio
- measures volatility
- generates expected RR
Beta
0
negative #
- 0 = no relationship between how price fluctuates and fluctuations in mkt
- negative = moves opposite direction of mkt
Rate of Return formula
Riak Free Rate + [Beta x (Expected Mkt Return - Risk Free Rate)]
if portfolio needs to exceed this rate, don’t use
Standard Deviation
how much sec has historically varied from its ave return over a period of time
compare volatility between sec w/ same ave returns
A - 12% Yr 1 = Ave 10% or B - 30% = Ave 10%
8% Yr 2 10%
B had wider deviations
Alpha
excess return earned by utual fund mgr above return earned by similar sec
way to evaluate mgr value
Efficient Mkt Hypothesis (EMH)
indv. investors w/ limited info, cannot out perform mkt on prolonged basis
best case - they can match mkt ret - costs of investing
Efficient Portfolio
high ret for given standard deviation
Efficient Portfolio
3 forms
- Strong
- Semi-strong
- Weak
indv will never be as quick at gathering and analyzing info
indv will always be 1 step behind mkt
indv will be unable to invest before mkt adjusts to current price
invest in securities that track mkt
Efficient Portfolio
3 forms
- Strong
- Semi-strong
- Weak
new info on sec not immediately incorporated in sec but is rapidly incorporated
$ adjustments are not predictable to take advantage of
invest in securities that track mkt
Efficient Portfolio
3 forms
- Strong
- Semi-strong
- Weak
mkt movements cannot be predicted by charting trends (tech analysis)
but may be predictible by analyzing fine aspects of business ( fundmental analysis)
active mgmt style
Style Drift
with passage of time a defined portfolio strategy changes to a different style w/o client consent
Strategic Asset Allocation
optimal mix (% basis) of major asset classes and sub classes
Strategic Asset Allocation
2 possible ways to divide assets
- Style division
- Asset class
- broken into categories (growth, value)
- types (preferred stock, govt. bond)
Tatical Asset Allocation
time mkt
using fundemental and technical analysis
Active vs Passive
benefits
searching, buying & selling
taking adv of best opps
capturing gains
greatest chance of outperforming mkt
hypothetically limit portfolio risk
