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L1 42 Portfolio Management: An Overview > A. Portfolio Management: An Overview > Flashcards

A. Portfolio Management: An Overview Flashcards

0
Q

Defined benefit

A

An annual amount

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1
Q

Defined benefit pension plans

A

Companies pay employees a defined benefit. Companies bear the investment risk.

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2
Q

Institutional Clients

A 
Defined benefit pension plans
Endowments and foundations
Banks 
Insurance companies
Investment Companies
Sovereign Wealth Funds
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3
Q

Endowments and foundations

A

???

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4
Q

Banks

A

???

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5
Q

Insurance Companies

A

???

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6
Q

Investment Companies

A

???

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7
Q

Sovereign wealth funds

A

Bonds???

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8
Q

The first steps of the portfolio management process

A

Understand the needs of your clients

Create an investment policy statement

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9
Q

Second steps of the portfolio management process

A

Security Analysis
Portfolio Construction
Monitoring
Performance Measurement Stages

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10
Q

Investment products to use in portfolio creation

A

Mutual Funds
ETF’s
Hedge Funds
Private Equity Funds

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11
Q

The financial needs of defined benefit pension plan investors

A

???

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12
Q

The financial needs of endowments and foundations

A

???

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13
Q

The financial needs of banks

A

???

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14
Q

The financial needs of insurance companies

A

???

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15
Q

The financial needs of hedge funds

A

???

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16
Q

The financial needs of Investment companies

A

???

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17
Q

The financial needs of sovereign wealth funds

A

???

18
Q

Defined contribution pension plan

A

Contributions are defined by the employee and company. The employee bears the risk.

19
Q

Mutual funds

A

Professionally managed investment pool

Investors: pro-rata claims on income and value

20
Q

Pooled investment products

A

???

21
Q

Portfolio approach provides investors with a way to reduce the risk associated with their wealth without necessarily decreasing their expected rate of return

A

Evaluating individual securities in relation to their contribution to the investment characteristics of the whole portfolio

22
Q

What do portfolios offer?

A

Equivalent expected returns with lower overall volatility of returns

23
Q

A measure that represents volatility of returns

A

Standard deviation

24
Q

Standard deviation

A

A measure of dispersion in the same units as the original data

The positive square root of the variance

25
Q

The probability weighted average

A

The expected value

26
Q

Variance

A

The expected value (the probability-weighted average( of squared deviations from a random variables expected value

27
Q

Dispersion

A

The variability around the central tendency

28
Q

Volatility

A

The standard deviation of the continuously compounded returns on the underlying asset

29
Q

Trade off between risk and reward in laymens

A

Return per unit of risk

30
Q

Invest shares as equally weighted in laymens

A

Invest the same dollar amount in each security for each quarter

31
Q

Equally weighted portfolio returns are the average returns of the individual shares and

A

The SD of an equally weighted portfolio is not simply the average of the SD of individual shares

32
Q

Equally weighted portfolios

A

Returns are averaged but SD’s are not

33
Q

Critical ideas about portfolios

A

Portfolios affect risk more than returns

34
Q

Portfolio characteristics

A

Help avoid effects of downside risk associated with investing in a single companies shares

35
Q

A simple measure of the value of diversification

A

Diversification ratio

36
Q

Diversification ratio

A

Calculated as the ratio of the standard deviation of the equally weighted portfolio to the standard deviation of the randomly selected security.

37
Q

The diversification ratio of the portfolios SD to the individual assets SD meausures…

A

The risk reduction benefits of an equal weighting method

38
Q

Simple portfolio construction method

A

Equal weighting

39
Q

Lower diversification ratio indicates

A

Greater Risk reduction

40
Q

The composition of portfolios matters

A

Rather, the risk to return profile

41
Q

Portfolios aren’t necessarily for downside protection

A

Because correlations and complements can move out of the investors favor so diversification benefits may be small a la 2009. Rather, diversification does not provide the same level of risk reduction during turmoil.

42
Q

Why do portfolios reduce risk?

A

Because combining securities whose returns do not move together provides diversification

43
Q

Risk reduction

A

Aka volatility reduction

L1 42 Portfolio Management: An Overview (6 decks)

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