Chapter 5 - Investment Decisions and Attribution Analysis Flashcards
What does the Treynor Ratio measure?
Uses systematic risk to measure risk adjusted return
How is the Treynor Ratio calculated?
(Risk Premium - RFR) / Beta
Performance ratio that uses systematic risk to measure risk adjusted returns.
Treynor Ratio
Performance ratio that uses standard deviation as a measure of total risk?
Sharpe Ratio
Sharpe Ratio Formula
Market Risk - RFR / Standard Deviation
What does the Sharpe Ratio measure?
Uses standard deviation as a measure of total risk
Difference between actual and expected return in a portfolio
Alpha
Formula to calculate Alpha:
Risk Premium - (RFR + Beta(Market Retun - RFR)
OR
Risk Premium - CAPM
Present value of promised or expected payments
Intrinsic Value
Formula for intrinsic value:
Total Market Value / Shares Outstanding
Strategy in which portfolio weights are constantly being adjusted to reflect changing market conditions.
Dynamic Asset Allocation
Total Market Value Formula:
Operating Cash Flow / (Required ROE - Sustainable Growth Rate)
If the intrinsic value is greater than the market price then the security is ______________ .
Undervalued
4 Points of the FAMA Decomposition Model:
1) RFR
2) Expected Return
3) Extra Return provided by market timing
4) Extra Return provided by a manager
Difference between actual return and return that should have been earned based on total risk
Net Selectivity
