CH5 Flashcards
What is the formula for Holding-Period Return (HPR)?
How is the HPR calculated if a stock is purchased for $25, sold for $27, and distributed $1.25 in dividends?
HPR = ($27 - $25 + $1.25) / $25 = 0.13 = 13.00%
What does HPR represent?
The sum of the dividend yield plus the capital gains yield
Define arithmetic average in the context of rates of return.
The sum of returns in each period divided by the number of periods
How is the Annual Percentage Rate (APR) calculated?
APR = Per-period rate × Periods per year
What is Value at Risk (VaR)?
A measure of downside risk indicating the worst loss with a certain probability
What is the Sharpe Ratio?
The ratio of portfolio risk premium to standard deviation
What is the risk-free rate?
The rate of return that can be earned with certainty
Define risk premium.
The expected return in excess of that on risk-free securities
What is excess return?
The rate of return in excess of the risk-free rate
What is the price of risk?
The ratio of risk premium to variance
What is the formula for Portfolio Risk Premium?
P = E(rp) - rf
E(rp) = Expected Return of the portfolio, rf = Risk-Free rate of return
What is the definition of Complete Portfolio?
Entire portfolio, including risky and risk-free assets
This encompasses all investments made by an investor.
What does Capital Allocation refer to?
Choice between risky and risk-free assets
This is a key decision in portfolio management.
What are examples of risk-free assets?
- Treasury bonds
- Price-indexed government bonds
- Money market instruments
These assets are considered to have minimal risk.
What does σC represent in portfolio theory?
Standard deviation of the complete portfolio
This reflects the total risk of the portfolio.
What is the Capital Allocation Line (CAL)?
Plot of risk-return combinations available by varying allocation between risky and risk-free
This line represents the trade-off between risk and return.
True or False: Passive Strategy involves active security analysis.
False
A passive strategy avoids security analysis.
What is the Capital Market Line (CML)?
Capital allocation line using market-index portfolio as risky asset
This line represents the risk-return profile of efficient portfolios.
What is the expense ratio of active mutual funds?
Average 1%
Active management typically incurs higher costs than passive investing.
What potential does Active management offer?
Potential for higher returns
This comes with increased risk and costs.
Fill in the blank: The risk of CDs and commercial paper is ______ compared to most assets.
miniscule
This indicates a very low level of risk associated with these financial instruments.
