Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Canadian securities Course VO2 > Chapter 15: Introduction to the Portfolio Approach > Flashcards

Chapter 15: Introduction to the Portfolio Approach Flashcards

You may prefer our related Brainscape-certified flashcards:
SIE Exam flashcards
1
Q

what is included in the returns on investment?

A

Capital gain or loss and cash flow (dividend)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

How to calculate expected return?

A

= (cash flow + capital gain or - captial loss)/beginning value.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

how to calculate the return rate (yeild) of an investment?

A

= (cash flow + ending value - begining value)/beginning value * 100%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is the different between annual rate of return and holding period return?

A

Annual rate of return: return rate of 1 year

Holding period return: return rate of the transaction period can be > or < 1y

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is ex-ante return?

A

Expected returns

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is ex-post return?

A

actual historical returns

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

what is the problem of investing base on rate of return only?

A

does not take risk into account.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Can you rank the risk level of different securities?

A

Treasury bills < bonds < debentures < preferred shares < common shares < derivatives

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is considered risk-free rate of return?

A

T-bills (assume is zero risk associated with)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

what is risk?

A

the likelihood that the actual return will be different from the expected return

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are the types of risk entails in the market?

A
  1. Inflation rate risk
  2. Business risk (uncertainty of the company’s future performance)
  3. Political risk
  4. Liquidity risk
  5. Interest rate risk
  6. Foreign investment risk (exchange rate risk,…)
  7. Default risk
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are the two categories of risk?

A
  1. Systematic risk or market risk (can’t reduce by diversification like inflation, business cycle, interest rate,..)
  2. Non-systematic risk or specific risk (price of specific security will change,.. can be reduced by diversification)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

what are the common measures to measure risk?

A

variance, standard deviation, and beta

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is variance measures to measure risk?

A
  • to which extend the possible realized returns differ from the expected return
  • the greater the distance estimated between the expected return and the possible returns, the
    greater the variance
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is standard deviation (expressed as a %) measures to measure risk?

A
  • is the measure of risk commonly applied to portfolios and to individual securities within that portfolio.
  • Standard deviation is the square root of the variance
  • The greater the standard deviation, the greater the risk
  • Based on past performance.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is beta measures to measure risk?

A
  • links the risk (volatility) of individual equity securities or a portfolio of equities to the market as a whole.
  • Measure the part of the fluctuation in price driven by changes in stock market.
  • the higher the beta, the greater the risk
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

How to calculate the expected return of a portfolio?

A

= R1.W1 + R2.W2+ …+ Rn.Wn
R: Return on a particular security
W: weight % of the security in the portfolio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Will the risk reduce according to the number of stocks in a portfolio?

A

No. although total risk does fall significantly when the first few stocks are added, the rate of reduction declines as the number of stocks increases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is the effect of adding negatively correlated securities to a portfolio does?

A

reduce risk. However, each additional security reduces risk at a lower rate. An accepted view is that, after 32 equities are added to a portfolio, the effect of adding additional securities to reduce risk is minimal.

20
Q

What is correlation?

A

refers to the way securities relate to each other when they are added to portfolio and to how the resulting combination affects the portfolio’s total risk and return.

21
Q

What is perfect positive correlation?

A

If the stock prices of those companies always move in the same direction (correlation = +1) -> not reduce risk.

22
Q

What is perfect negative correlation (-1)?

A

the stock prices of two companies always move in opposite directions -> no risk.

23
Q

What does it mean when beta = 1, >1 and <1?

A

Beta = 1: equity or equity portfolio that moves up or down to the same degree as the stock market
Beta > 1: security or portfolio that moves up or down more than the market (typically cyclical industries)
Beta < 1: security that moves less than the market
(In reality, most portfolios have a beta between 0.75 and 1.40)

24
Q

What is alpha?

A

the excess return earned on the portfolio when the portfolios outperform the market.

25
Q

What are the portfolio manager styles?

A

Active and passive

26
Q

What is active investment strategy?

A

Target to outperform a benchmark portfolio on a risk-adjusted basis

27
Q

What are the strategies of active equity investment?

A
  1. Bottom-up analysis (focus on individual stocks and build the portfolios of the best stocks)
  2. Top-down analysis (start with macroeconomic factors then narrowing to individual stocks)
    (2 strategies are not mutually exclusive)
28
Q

What is passive investment strategy?

A

tend to replicate the performance of a specific market index without trying to beat it.

29
Q

What are the strategies of passive investment?

A
  1. Indexing (buying and holding a portfolio that matches a index)
  2. Buy and hold (believe that securities markets are efficient which means price reflects all information on expected return and risk)
30
Q

What are the equity manager styles?

A

growth, value, or sector rotation

31
Q

What is growth managers?

A
  • focus on stocks with above average potential for price increase.
  • Bottom - up focus on EPS and pay more for company with potential of high price -> usually low dividend yeild.
  • Not concerned with quaterly portfolio fluctuations.
32
Q

What is the risk of Growth portfolios?

A
  • If EPS falters, it can cause large percentage price declines.
  • Reported EPS, above or below analysts’ expectations, produces high portfolio volatility.
  • These types of securities are highly vulnerable to market cycles.
33
Q

What is the characteristics of growth portfolios in term of valuation ratios?

A
  • High price-to-earnings
  • High price-to-book value
  • High price-to-cash flow
34
Q

What are the characteristics of growth portfolios?

A
  • Long-term returns mostly from capital gain.
  • Perform best in rising market
  • investors in taxable accounts may be liable for increased amounts of capital gains tax every year
35
Q

What are value managers?

A
  • Focus on specific stock selection.
  • Bottom-up picker with intensive research.
  • Security turnover is typically low because they wait for a stock’s intrinsic value to be realized (buy discounted stocks that should eventually rise in price).
  • seek stocks that are overlooked, disliked, or out of favour with individual investors, institutional investors, and equity analysts
36
Q

What is the characteristics of Value portfolios in term of valuation ratios?

A
  • Lower annualized standard deviation
  • Lower historical beta
  • Stock price is already low and could remain low for a long time
37
Q

What are the characteristics of Value portfolios?

A
  • Low price-to-earnings ratio
  • Low price-to-book value ratio
  • Low price-to-cash flow ratio
  • High dividend yield
38
Q

What are the characteristics of Value portfolios?

A
  • Long-term returns are similar to Growth portfolio but with higher current dividend and less volatility
  • Perform best in down or inefficient markets
  • Suitable for low-to-medium tolerance for market risk and long-term investment horizons.
  • Incur fewer capital gains and ignore short-term market fluctuations.
39
Q

What is Sector rotation manager?

A
  • Top-down approach (identify trend and industry selection)
  • Typically buy large-cap stocks to mazimize their liquidity and not as concerned with individual stock characteristic.
  • Focus on current phase of the economic cycle, direction headed and various sectors affected.
40
Q

What are the characteristics of Sector rotation portfolios

A
  • High volatility caused by industry concentration and rotation between industries.
  • worse when choosing wrong economic scenario and industries do not perform as expected.
  • Can be underperform the market benchmark in short-term but turnover tends to be high (which can have tax problem)
  • trying to outperform the market averages.
  • Variations in the economic cycle can have a dramatic bearing on the timing of sector rotation
41
Q

What is the basic industry rotation strategy?

A
  • shifting back and forth between cyclical industries (paper, mine,..) and defensive industries (banks or utilities,..)
42
Q

What are the fixed-income managers styles?

A
  1. term to maturity
  2. Credit quality
  3. Interest rate anticipators.
43
Q

What is term-to-maturity managers style?

A
  • Short-term managers hold T-bills, short-term bonds -> portfolios are less volatile
  • Medium-term managers hold 5-10 years securities such as mortgage fund.
  • Long-term managers hold >10 years securities.
44
Q

What is Creadit quality managers style?

A
  • Balance between return potential and risk of default.
  • To mitigate this risk, managers often invest in high-yield bonds that mature in less than three years
  • Also consider liquidity (Lower-rated bonds have less liquidity than government issues so difficult to sell in a declining market)
45
Q

What are junk bonds?

A

High-yield bonds that are non-investment grade products.

46
Q

What are interest rate anticipators managers?

A
  • Anticipating the direction of interest rate to structuring the portfolio (ex: i increase then shorten the average term on bond investment)
  • Also called duration switching
  • Works best when the yield curve is normal (wide gap between short and long term rate)
  • If the yield curve is flat, it is not advantageous to extend the term to maturity of the portfolio

Canadian securities Course VO2 (14 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions