Chapter 4 Flashcards
Borrowing Portfolios
Borrowing Portfolios - Also known as a leveraged portfolio, it involves borrowing funds to increase the investment in the market above 100% (for example, a margin account).
Capital Market Line (CML)
Capital Market Line (CML) - A linear representation of the efficient frontier beginning at the risk-free rate of return and passes through the point of tangency to the efficient frontier.
Core-Satellite
Core-Satellite - A strategy that uses index funds to fulfill the “core” components of the desired asset allocation, such as large cap stocks, which tend to be extremely efficient, making it difficult to outperform the index.
Efficient Frontier
Efficient Frontier - A graphical representation of the most efficient portfolios for various levels of risk.
Efficient Portfolio
Efficient Portfolio - A portfolio that has the highest return for a given level of risk.
Lending Portfolios
Lending Portfolios - A portfolio that consists of less than 100% in the market portfolio with the remainder of the portfolio invested in lending securities (bonds for example).
Market Timing
Market Timing - An attempt to anticipate the movement of equities and earn returns in excess of the market through the use of technical analysis.
Mean-Variance Optimization (MVO)
Mean-Variance Optimization (MVO) - Software packages that calculate an efficient frontier based upon user supplied estimates of the returns, standard deviations, and correlations among sets of investment vehicles. The model seeks to maximize the expected return of a portfolio based on a selected level of risk.
Risk Indifference Curve
Risk Indifference Curve - Indicates those portfolios an investor would be indifferent to holding.
Risk Premium
Risk Premium - The incremental return provided by a market portfolio over the risk-free rate of return.
Risk Tolerance
Risk Tolerance - A measure of an investor’s ability and willingness to expose him/herself to risk (price fluctuation in investments) in order to seek higher investment returns.
Sector Rotation
Sector Rotation - Another active management strategy in which economic data is analyzed in an attempt to predict where the economic cycle is headed in the future and, based on that information, position the portfolio in the most opportune industry sectors in an attempt to outperform the market.
Securities Market Line (SML)
Securities Market Line (SML) - A graphical representation of the capital asset pricing model (CAPM), which plots risk (as measured by beta) and return for various combinations of the market portfolio and the risk-free rate of return.
Strategic Asset Allocation
Strategic Asset Allocation - Diversification strategy across a broad set of asset classes in an effort to minimize the probability of substantial losses in one investment category significantly impacting the performance of the portfolio as a whole.
Tactical Asset Allocation
Tactical Asset Allocation - Attempts to outperform the market over shorter periods of time by placing investment dollars in those asset classes that the investor expects will outperform market returns over the period.
