CFA 42: Portfolio Risk and Return: Part 1 Flashcards
normal distribution
Investment Characteristics of Assets
A continous, symmetric probability distribution that is completely described by its mean and its variance.
skewness
Investment Characteristics of Assets
A quantitative measure of skew (lack of symmetry); a synonym of skew.
liquidity
Investment Characteristics of Assets
the ability to purchase or sell an asset quickly and easily at a price flose to fair market value. The ability to meet short-term obligations using assets that are the most readily converted into cash.
risk aversion
Risk Aversion and Portfolio Selection
The degree of an invstor’s inability and unwillingness to take risk.
risk averse
Risk Aversion and Portfolio Selection
The assumption that an investor will choose the least risky alternative.
risk tolerance
Risk Aversion and Portfolio Selection
the amount of risk an investor is willing and able to bear to achieve an investment goal.
indifference curve
Risk Aversion and Portfolio Selection
A curve representing all the combinations of two goods or attributes such that the consumer is entirely indifferent among them.
capital allocation line
Risk Aversion and Portfolio Selection
A graph line that describes the combinations of expected return and standard deviation of return available to an investor from combining the optimal portfolio of risky assets with the risk-free asset.
covariance
Risk Aversion and Portfolio Selection
A measure of the co-movement (linear association) between two random variables.
correlation coefficient
Risk Aversion and Portfolio Selection
A number between -1 and +1 that measures the consistency or tendency for two investments to act in a similar way. It is used to determine the effect on portfolio risk when two assets are combined.
minimum-variance portfolio
Efficient Frontier and Investor’s Optimal Portfolio
The portfolio with the minimum variance for each given level of expected return.
global minimum variance portfolio
Efficient Frontier and Investor’s Optimal Portfolio
The portfolio on the minimum-variance frontier with the smallest variance of return.
Markowitz efficient frontier
Efficient Frontier and Investor’s Optimal Portfolio
The graph of the set of portfolios offering the maximum expected return for their level of risk (standard deviation of return).
two-fund separation theorem
Efficient Frontier and Investor’s Optimal Portfolio
The theory that all investors regardless of taste, risk preferences, and initial wealth will hold a combination of two portfolios or funds: a risk-free asset and an optimal portfolio of risky assets.
