Chapter 5 Flashcards
Alpha
Alpha - The difference between the actual return on a portfolio and its expected return as outlined by the capital asset pricing model.
Analysis Effect
Analysis Effect - A component of fixed-income attribution analysis that measures the portfolio manager has the ability to invest in securities that are temporarily undervalued.
Asset Allocation
Asset Allocation - The investment decision that involves assigning portfolio weights to each asset. This can be achieved through software programs that minimize risk or through a portfolio manager’s expertise.
Attribution Analysis
Attribution Analysis - An evaluation tool that is used by investors to measure the ability of managers to outperform a benchmark portfolio. There are generally two components that can be attributed to managerial skill: asset selection and asset allocation.
Benchmark Portfolio
Benchmark Portfolio - A portfolio that has similar securities, similar risk characteristics, and similar return expectations as an invested portfolio. It is used as a comparison performance metric. Also called normal portfolio.
Bond Market Line
Bond Market Line - An illustration of the relation between the expected rate of return on a bond portfolio and its duration.
Brinson, Hood, and Beebower
Brinson, Hood, and Beebower - Three investment advisers who co-authored a seminal academic paper on attribution analysis.
Buy and Hold Strategy
Buy and Hold Strategy - A simple investment strategy in which the investor forms a portfolio and holds onto the securities over the investment horizon. There is no rebalancing of security weights when investors pursue this strategy.
Dynamic Asset Allocation
Dynamic Asset Allocation - An investment strategy in which the portfolio weights are constantly being adjusted to reflect changing market conditions and changing asset values.
Enterprise Value Multiple
Enterprise Value Multiple - A relative valuation tool defined as the ratio of a firm’s enterprise value over its earnings before interest, taxes, and depreciation.
Eugene Fama
Eugene Fama - A Nobel Prize winning economist who developed the efficient markets hypothesis and the Fama Decomposition.
Fama Decomposition
Fama Decomposition - An attribution analysis tool that identifies a portfolio manager’s ability to use total risk and market timing to outperform a benchmark portfolio.
Harry Markowitz
Harry Markowitz - A Nobel Prize winning economist who developed the efficient frontier and is credited with being the original developer of an optimal portfolio allocation model.
Indexing
Indexing - A passive investment strategy in which a portfolio is formed that mimics the performance of an index. Indexing is typically accomplished using mutual funds or exchange traded funds.
Jensen’s Alpha
Jensen’s Alpha - An absolute portfolio performance measure defined as the difference between the portfolio’s actual return and its expected return.
Net Selectivity
Net Selectivity - A product of the Fama Decomposition in which the ability of a manager to select mis-priced securities is identified.
Normal Portfolio
Normal Portfolio - A portfolio that has similar securities, similar risk characteristics, and similar return expectations as an invested portfolio. It is used as a comparison performance metric. Also called benchmark portfolio.
Outperformance
Outperformance - When portfolio managers generate returns that exceed the relevant benchmark portfolio.
Policy Effect
Policy Effect - A component of fixed-income attribution analysis that measures the return impact of the difference between the duration of the index and the duration of the invested portfolio.
Price to Book Value Ratio
Price to Book Value Ratio - A relative valuation tool defined as the ratio of stock price to the firm’s equity book value per share.
Price to Cash Flow Ratio
Price to Cash Flow Ratio - A relative valuation tool defined as the ratio of stock price to the firm’s cash flow per share.
Price to Earnings Ratio
Price to Earnings Ratio - A relative valuation tool defined as the ratio of stock price to the firm’s earnings per share.
Price to Sales Ratio
Price to Sales Ratio - A relative valuation tool defined as the ratio of stock price to the firm’s total revenue per share.
Rate Anticipation Effect
Rate Anticipation Effect - A component of fixed-income attribution analysis in which the portfolio manager is evaluated based on the ability to anticipate interest rate movements by changing the duration of the portfolio.
Relative Value Analysis
Relative Value Analysis - A performance tool in which a security is compared to a peer group using multiples.
Sharpe Ratio
Sharpe Ratio - A relative measure of portfolio performance in which total risk as measured by standard deviation is used to estimate risk-adjusted performance.
Tactical Asset Allocation
Tactical Asset Allocation - Changes in a portfolio allocation to capture short-term price movements.
Technical Analysis
Technical Analysis - An asset selection tool that uses historical asset prices and volume to make portfolio selection decisions.
Trading Effect
Trading Effect - A component of fixed-income attribution analysis in which the efficiency of the portfolio manager in executing trades is evaluated.
Treynor Ratio
Treynor Ratio - A relative measure of portfolio performance in which systematic risk as measured by beta is used to estimate risk-adjusted performance.
Underperformance
Underperformance - When portfolio managers generate returns that are less than the relevant benchmark portfolio.
