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Investments CFP > Asset Pricing Models > Flashcards

Asset Pricing Models Flashcards

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CFP® flashcards
1
Q

Modern Portfolio Theory invented by who

A

Harry Markowitz 1954

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2
Q

Modern Portfolio Theory does what

A

quantifies the relationship between different risky asset classes using asset class average mean return, risk, and correlations between each set of asset class

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3
Q

What is a risky asset re: Modern Portfolio Theory

A

an investment whose returns vary - vs a non-risky asset like a T-bill whose returns are fixed

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4
Q

Modern Portfolio Theory uses standard deviation or beta?

A

Standard Deviation

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5
Q

Driving assumptions of Modern Portfolio Theory

A

-investors are rational/risk averse
-demand to be compensated for risk
-will combine asset classes which collectively will produce the highest possible average return per unit of risk

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6
Q

Efficient Frontier Portfolio produces what

A

highest possible return for unit of risk

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7
Q

Efficient frontier portfolios represent

A

mean-variance optimized efficient portfolios

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8
Q

Combining asset classes together can produce what re: risk

A

can produce a lower risk portfolio than either class individually

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9
Q

A portfolio below the efficient frontier offers what

A

inefficient - offers a lower return for the level of risk

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10
Q

Can you obtain a portfolio above the efficient frontier?

A

no

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11
Q

Can an individual investor have more than one efficient portfolio

A

No

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12
Q

Capital market line assumes investors invest in what

A

risky and non-risky assets

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13
Q

Capital market Line assumes there are how many optimal portfolios

A

only one

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14
Q

Capital Market Line Optimal Portfolio is called

A

Market portfolio -

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15
Q

How can you change your risk/return using Capital Market Line

A

change the ratio of market portfolio and non-risky assets

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16
Q

Capital market line uses beta or standard deviation

A

standard deviation

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17
Q

Capital Market Line invented by whom

A

James Tobin 1958

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18
Q

Unsystematic Risk also called what

A

Alpha

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19
Q

Systematic risk also called what

A

Beta

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20
Q

Can you reduce systematic risk/Beta with diversification?

A

No

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21
Q

Can you reduce unsystematic risk/Alpha through diversification?

A

Yes - to near zero

22
Q

Who invented security market line?

A

William Sharpe in 1964

23
Q

Security Market Line says what re: stock portfolio’s total risk can be broken down how

A

Can be broken down into 2 parts - Unsystematic risk, or Alpha AND Systematic risk or Beta. You can reduce Alpha/Unsystematic risk through diversification

24
Q

Sharpe postulated that since alpha can be reduced to near zero by diversification

A

that the only relevant risk is Beta/Systematic risk

25
Q

CAPM tells you what

A

the amount of return the security must earn (required return) in order to fairly compensate for the risk taken

26
Q

Required rate of return is used in what 2 methods?

A

CAPM and Dividend Growth Model

27
Q

CAPM and SML are used for individual securities or portfolio?

A

Individual

28
Q

What is this formula
Ri = Rf + (Rm - Rf)Bs

A

CAPM/SML

29
Q

Is CAPM the same thing as SML?

A

Yes

30
Q

Stocks Dividend 5 years ago was 1.49. Current dividend is 1.90. What is the growth rate?

A

N = 5
PV = 1.49 CHS
PMT = 0
FV = 1.90
Solve for I
I = 4.98 or 5%

31
Q

What is this formula
r = D1/Po + g

A

Expected return

32
Q

Price = 48
Dividend 5 years ago = 1.49
Current dividend = 1.90
Rf = 4%
Rm = 9 (expected market return)
Bs = 1.1
Find the stocks expected return

A

First figure out the growth rate
N = 5
PV = 1.49 CHS
PMT = 0
FV = 1.90
Solve for I
I = 4.98 or 5%
THEN use expected return formula - Take Current Dividend * g
1.90 * 1.05 = 2

2/48 + .05 = 9.2% expected return

33
Q

What is this formula
Rs = Rf + Bs(Rm - Rf)

A

Required return

34
Q

CAPM relies on 2 variables what are they

A

Beta and market risk premium

35
Q

Arbitrage Pricing Theory says what about risk

A

return on a stock or portfolio is not based just on Beta and Market risk but also
-Inflation
-Industrial Output
-Risk Premiums (Rm-Rf) & Beta
-Interest Rates

36
Q

Focus of APT regarding systematic variables

A

unexpected changes to systematic variables

37
Q

What is arbitrage

A

Buying in one market and simultaneously selling in another market to take advantage of price differentials

38
Q

Arbitrage assures what regarding price

A

that there is only one price - if there is a difference traders will arbitrage it away until there is only one price

39
Q

Is strong form Efficient market theory supported by empirical evidence?

A

No

40
Q

Strong form EMT says what regarding insider information

A

it won’t help - it’s already priced in - this is not necessarily true

41
Q

Semi strong EMT say what re: insider info

A

insider info would boost returns - this is backed by empirical evidence

42
Q

Semi strong EMT says what regarding fundamental analysis?

A

It does not help boost returns because it is available to everyone in the market

43
Q

Weak form EMT says what about insider info and fundamental analysis?

A

They both work but technical analysis does not work

44
Q

What makes markets efficient?

A

-many competing participants
-information is random (not known in advance) and readily available
-price react instantaneously to new information
-transaction costs are small

45
Q

Are there anomalies to EMT?

A

Yes but not supported by empirical evidence such as
-Low p/e stocks
-small firms
-investing in January
-firms not widely covered
All tend to perform well

46
Q

Individual Investors tend to perform how relative to the S&P 500

A

Realize about 1/3 of the returns of S&P 500 while taking more risk

47
Q

Object of Behavioral Finance

A

to overcome our emotions so we can act more rationally in our investment decisions

48
Q

Study showing individuals realized 1/3 of the returns of S&P 500

A

Dalbar in 2007

49
Q

Can you have negative Beta?

A

Yes. Beta can be positive, zero, or negative.

50
Q

Jensen and Treynor ratios assume what type of portfolio, diversified or non-diversified?

A

Diversified

51
Q

Per MPT the optimal portfolio is located at the point of tangency between the efficient frontier and the what

A

indifference curve

52
Q

Operating profit margin ebit rhymes with profit

A

ebit
——-
sales

Investments CFP (14 decks)

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