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
Model that tries to prove that active management prevails.
BHB Model
Component of fixed income attribution analysis where return impact of difference between duration of benchmark and duration of portfolio.
Policy Effect
Return impact difference strategic duration of portfolio and tactical deviations from it.
Rate Anticipation Effect
Ability of manager to measure undervalued securities
Analysis Effect
Measures return impact of short term changes in portfolio composition.
Trading Effect
Weak Form Efficient Market Hypothesis includes:
Historical Prices and Volume Data
Semi-Strong Form Efficient Market Hypothesis includes:
Publicly available information
Strong Form Efficient Market Hypothesis includes:
All Relevant Information
