CH 1 Flashcards
Define “asset allocation”.
Allocation of an investment portfolio across broad asset classes (i.e ; stocks, bonds, real estate and commodities).
Define “asset classes”
Investment assets can be categorized into broad ‘asset classes’, such as stocks, bonds, real estate and commodities.
Define “security selection”.
Choice of specific securities within each asset class.
Define “security analysis”.
Analysis of the value of securities.
Define “Top - Down” portfolio construction.
Top - Down portfolio construction starts with asset allocation. An investor decides what proportion of the overall portfolio ought to be moved into stocks, bonds and so forth.
In this way the broad features of the portfolio are established.
This division of asset allocation is done before deciding on what particular securities should be held in each asset class.
Define “Bottom - Up” portfolio construction.
In this process the portfolio is constructed from securities that seem attractively priced without as much concern for the resultant asset allocation.
Downsides to this method is that it can result in investing in only one sector or industry which can expose the portfolio to one source of uncertainty (increased unsystematic risk).
However this strategy does focus the portfolio on the assets that seem to offer the most attractive investment opportunities.
Define “private equity”.
Investments in companies whose shares are not traded in public stock markets.
What is the “LIBOR” rate?
The rate at which banks borrow from each other.
Define the “treasury bill rate”.
The rate at which the US government borrows.
Define the “TED Spread”.
A common measure of credit risk in the banking sector.
Define “securitization”.
Pooling loans into standardized securities backed by those loans, which can then be traded like any other security.
What does the acronym ‘P and I‘ stand for?
Principal and interest.
