Chapter 5: Investment Decisions and Attribution Analysis

Question 1

what is the risk type that the Treynor Ratio is adjusted for?

Answer 1

Systematic Risk (Beta)

Question 2

what is the risk type that the Sharpe Ratio is adjusted for?

Answer 2

Total Risk (Standard Deviation)

Question 3

what is the risk type that the Jensen’s Alpha is adjusted for?

Answer 3

Systematic Risk (Beta)

Question 4

what is the performance measure for Treynor Ratio?

Answer 4

Relative

Question 5

What is the performance measure for Sharpe Ratio?

Answer 5

Relative

Question 6

What is the performance measure for Jensen’s Alpha?

Answer 6

Absolute

Question 7

what is the definition for asset allocation?

Answer 7

an investment decision in which portfolio weights are assigned to reflect the investor’s risk profile.

Question 8

the buy and hold strategy

Answer 8

the investor does nothing to rebalance the portfolio weights.

Question 9

what does tactical asset allocation attempt to do?

Answer 9

profit from short term undervalued securities.

Question 10

dynamic allocation strategy

Answer 10

the portfolio weights are constantly being adjusted to reflect changing market conditions and changing asset values.

Question 11

what are the 4 fundamental means of asset selection?

THINK “DIRT”

Answer 11

1. Discounted cash flow technique
2. Indexing
3. Relative valuation with multipliers
4. Technical analysis

Question 12

what is intrinsic value?

Answer 12

the present value of a stock or bond’s cash flow.

Question 13

what is technical analysis

Answer 13

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

Question 14

what is policy effect

Answer 14

measures the return of the difference between the duration of a benchmark and the duration of the portfolio

Question 15

what is Rate Anticipation Effect

Answer 15

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

Question 16

what does Analysis Effect measure?

Answer 16

the ability of the manager to locate undervalued securities

Question 17

what is the trading effect

Answer 17

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

Question 18

what is the management effect?

Answer 18

the Rate Anticipation Effect, the Analysis Effect and the Trading Effect measure the active skills of the portfolio manager

Question 19

what are “pooled investments”

Answer 19

mutual funds

Question 20

if Intrinsic Value is more than Market Price, then…

Answer 20

the security is undervalued

Question 21

if Intrinsic Value is less than Market Price, then…

Answer 21

the security is overvalued

Question 22

if the security is overvalued then what can the investor do to gain value on the stock?

Answer 22

take a short position or use derivative securities to hedge against a falling stock price.

Question 23

Price to earnings Ratio =

Answer 23

stock price
/
earnings per share

Question 23

what is the equation to value a business (Total Market Value) of a company?

Answer 23

Operating Cash Flow
/
Required Return on equity - dividend growth rate

Question 24

what is the price per share (intrinsic value) calculation?

Answer 24

total market value
/
total amount of shares

Question 25

price to book ratio =

Answer 25

stock price
/
book value (net worth) per share

Question 26

price to sales ratio =

Answer 26

stock price
/
the total dollar amount of sales per share

Question 27

price to cash flow =

Answer 27

stock price
/
the total dollar amount of net cash flow (income minus expenses) per share

Question 28

enterprise to earnings =

Answer 28

a more complicated ratio that combines a company’s book value with its market value
/
earnings

Question 29

net cash flow calculation

Answer 29

income - expenses

Question 30

Treynor Ratio Caluclation

Answer 30

Risk of Port. - Risk-Free Rate
/
Beta (systematic risk)

Question 31

Sharpe Ratio Calculation

Answer 31

Risk of Port. - Risk-Free Rate
/
Standard Deviation (total risk)