Chapter 1: Portfolio Management Process Flashcards
What are some of the client’s needs and guidelines
Client’s risk profile, suitability1, statement of objectives and constraints;
Clearly defined duties of all parties involved;
Asset allocation policies, performance benchmarks and how performance is measured;
Guidelines for rebalancing the portfolio; and
Means and frequency of communication with the client and fiduciaries to ensure continuity and to
build trust.
What should the investment objective include
include both the return objective and risk tolerance.
What is the role of a covered person (RM)
He is responsible for helping the client to formulate investment objectives and constructing the portfolio.
He also monitors the portfolio in order to help the client manage portfolio risks and generate returns that are in line with the client’s investment objectives.
Difference between Discretionary vs Advisory
Discretionary: Covered Person has the support of an internal portfolio manager who will assist to manage the client’s portfolio in line with the investment strategy. While the actual management of the portfolio may be handled by the internal portfolio manager, a Covered Person has the obligation to ensure that his client’s investment strategy is carried out and that the investment objectives are met.
Advisory: a Covered Person will recommend to the client suitable investments for the client to make informed decisions.
What are the differences between return and yield
The return on an investment measures the gain or loss from the investment. It includes interests, dividends, and capital gains.
The yield from an investment, on the other hand, measures the annualized income, such as interest and dividends. Take note that the yield does not include capital gains on investment
Formula for simple returns
Return on Investment = (Ve - Vb + I )/Vb
Ve = value at End
Vb = value at beginning
I = Income
What is the dollar weighted return?
DWR equivalent to the IRR. It is the discount rate which equates the initial cash outlay with cash flows which occur during the investment period.
What is the time weighted return of portfolio
The TWR measures the performance of the investment independent of the injection or withdrawal of cash by the client.
What is the annualised return
The annualized return can be computed from periods of time that are either shorter than a year or longer than a year.
What is the expected return
Based on the probability of each scenario and the returns obtained within each scenario
What is the difference between risk and uncertainty
While risk can be measureed, uncertainty cannot be measured
Measure of risk can be through variance and sd
How to calculate portfolio returns
Is the weighted average of the returns of the individual securities in the portfolio
Rp= Summation of (wi)(ri)
How to measure portfolio risk
To calculate the portfolio risk
Write it down then refer
Note that the less correlated the two stocks are to each other, the lower the correlation coefficient between the two security, which will lower the risk of the portfolio
What is beta
is beta (β), which measures the volatility of a portfolio’s return relative to a market
index.
The higher the beta, the more volatile a portfolio’s return is compared to the market.
For example, a portfolio with a beta of 1.5 means that if the market goes up by 10% over a certain period, it will on average go up by 15% and vice versa.
What is the sharpe ratio
This is a measure of a portfolio’s annualized return in excess of the risk-free rate of interest and adjusted for the portfolio’s total risk, as defined by its standard deviation.
Sharpe Ratio = (Rp -Rf ) / sd of portfolio
The higher the portfolio sharpe ratio, the better its return relative to the portfolio total risk
