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Investment Planning > Chapter 5 > Flashcards

Chapter 5 Flashcards

1
Q

Alpha

A

Alpha - The difference between the actual return on a portfolio and its expected return as outlined by the capital asset pricing model.

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2
Q

Analysis Effect

A

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.

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3
Q

Asset Allocation

A

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.

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4
Q

Attribution Analysis

A

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.

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5
Q

Benchmark Portfolio

A

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.

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6
Q

Bond Market Line

A

Bond Market Line - An illustration of the relation between the expected rate of return on a bond portfolio and its duration.

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7
Q

Brinson, Hood, and Beebower

A

Brinson, Hood, and Beebower - Three investment advisers who co-authored a seminal academic paper on attribution analysis.

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8
Q

Buy and Hold Strategy

A

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.

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9
Q

Dynamic Asset Allocation

A

Dynamic Asset Allocation - An investment strategy in which the portfolio weights are constantly being adjusted to reflect changing market conditions and changing asset values.

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10
Q

Enterprise Value Multiple

A

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.

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11
Q

Eugene Fama

A

Eugene Fama - A Nobel Prize winning economist who developed the efficient markets hypothesis and the Fama Decomposition.

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12
Q

Fama Decomposition

A

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.

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13
Q

Harry Markowitz

A

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.

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14
Q

Indexing

A

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.

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15
Q

Jensen’s Alpha

A

Jensen’s Alpha - An absolute portfolio performance measure defined as the difference between the portfolio’s actual return and its expected return.

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16
Q

Net Selectivity

A

Net Selectivity - A product of the Fama Decomposition in which the ability of a manager to select mis-priced securities is identified.

17
Q

Normal Portfolio

A

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.

18
Q

Outperformance

A

Outperformance - When portfolio managers generate returns that exceed the relevant benchmark portfolio.

19
Q

Policy Effect

A

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.

20
Q

Price to Book Value Ratio

A

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.

21
Q

Price to Cash Flow Ratio

A

Price to Cash Flow Ratio - A relative valuation tool defined as the ratio of stock price to the firm’s cash flow per share.

22
Q

Price to Earnings Ratio

A

Price to Earnings Ratio - A relative valuation tool defined as the ratio of stock price to the firm’s earnings per share.

23
Q

Price to Sales Ratio

A

Price to Sales Ratio - A relative valuation tool defined as the ratio of stock price to the firm’s total revenue per share.

24
Q

Rate Anticipation Effect

A

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.

25
Q

Relative Value Analysis

A

Relative Value Analysis - A performance tool in which a security is compared to a peer group using multiples.

26
Q

Sharpe Ratio

A

Sharpe Ratio - A relative measure of portfolio performance in which total risk as measured by standard deviation is used to estimate risk-adjusted performance.

27
Q

Tactical Asset Allocation

A

Tactical Asset Allocation - Changes in a portfolio allocation to capture short-term price movements.

28
Q

Technical Analysis

A

Technical Analysis - An asset selection tool that uses historical asset prices and volume to make portfolio selection decisions.

29
Q

Trading Effect

A

Trading Effect - A component of fixed-income attribution analysis in which the efficiency of the portfolio manager in executing trades is evaluated.

30
Q

Treynor Ratio

A

Treynor Ratio - A relative measure of portfolio performance in which systematic risk as measured by beta is used to estimate risk-adjusted performance.

31
Q

Underperformance

A

Underperformance - When portfolio managers generate returns that are less than the relevant benchmark portfolio.

Investment Planning (5 decks)

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