Chapter 5 (Investment Decisions)

Question 1

This provides the reasons behind that performance.

Answer 1

Attribution Analysis

Question 2

This ratio is the first performance ratio and uses systematic risk to measure risk adjusted returns.

Answer 2

Treynor Ratio

Question 3

He used standard deviation as the measure of total risk instead of the beta used by Treynor.

Answer 3

Sharpe Ratio

Question 4

He used similar metrics as Sharpe and Treynor, but he added market data to the model. As such, this is an absolute measure of performance and is widely interpreted as a measure of excess return

Answer 4

Jensen’s Alpha

Question 5

This is the difference between the actual return on a portfolio and its expected return as outlined by the capital asset pricing model.

Answer 5

Alpha

Question 6

This strategy is one in which deviations from the long-term allocations are pursued over the short term to increase returns by taking advantage of current market conditions that favor one asset class over another.

Answer 6

Tactical Asset Allocation

Question 7

This is a strategy in which the portfolio weights are constantly being adjusted to reflect changing market conditions and changing asset values.

Answer 7

Dynamic Asset Allocation

Question 8

This estimate the intrinsic value of an asset by calculating the present value of all future cash flows the asset is expected to generate.

Answer 8

Discounted Cash Flow

Question 9

These techniques compare the fundamentals of similar companies with the aim of identifying which are relatively undervalued.

Answer 9

Relative Valuatioon

Question 10

This is the use of historical pricing and volume data to make asset selection decisions.

Answer 10

Technical Analysis

Question 11

This is defined as the difference between the actual return on the portfolio and the return that should have been earned based on total risk.

Answer 11

Net Selectivity

Question 12

This model begins with the idea that the total return on portfolio can be broken into four component pieces: 1. The risk-free rate of return
2. The expected return demanded by the client
3. The extra return provided by the manager due to market timing skills 4. The extra return provided by the manager due to security selection skills

Answer 12

Fama Decomposition Model

Question 13

This is intended to evaluate the effectiveness of active management and to to distinguish between allocation and selection skills.

Answer 13

Brinson, Hood, and Beebower (BHB) model

Question 14

This effect measures the return impact of the difference between the duration of the benchmark and the duration of the portfolio.

Answer 14

Policy Effect

Question 15

This measures the return impact of the difference between the strategic duration of the portfolio and tactical deviations from it.

Answer 15

Rate Anticipation Effect

Question 16

This measures the ability of the manager to locate undervalued securities.

Answer 16

Analysis Effect

Question 17

This measures the return impact of short-term changes in portfolio composition

Answer 17

Trading Effect

Question 18

CH6

1. Weak Form Efficiency: Market prices are functions of historical prices and volume data.
2. Semi-Strong Form Efficiency: Market prices are functions of publicly available information (which includes the first data set).
3. Strong Form Efficiency: Market prices are functions of all relevant information (which includes private information plus both the first and the second data sets).

Answer 18

Efficient Market Hypothesis