Chapter 5 - Portfolio Theory Flashcards

1
Q

Define Arithmetic Average

A

The sum of returns in each period divided by the number of periods.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Define Asset Allocation

A

Portfolio choice among broad investment classes.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Define Capital Allocation

A

The choice between risky and risk-free assets.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Define Capital Allocation Line (CAL)

A

Plot of risk-return combinations available by varying portfolio allocation between a risk-free asset and a risky portfolio.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Define Capital Market Line

A

The capital allocation line using the market index portfolio as the risky asset.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Define Complete Portfolio

A

The entire portfolio including risky and risk-free assets.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Define Dollar-Weighted Average Return

A

The internal rate of return on an investment.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Define Excess Return

A

Rate of return in excess of the risk-free rate.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Define Expected Return

A

The mean value of the distribution of HPR.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Define Geometric Average

A

The single per-period return that gives the same cumulative performance as the sequence of actual returns.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Define Holding-Period Return

A

Rate of return over a given investment period.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Define Inflation Rate

A

The rate at which prices are rising, measured as the rate of increase of the CPI.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Define Kurtosis

A

Measure of the fatness of the rails of a probability distribution relative to that of a normal distribution. Indicates likelihood of extreme outcomes.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Define Mean-Variance Analysis

A

Ranking portfolios by their Sharpe ratios.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Define Nominal Interest Rate

A

The interest rate in terms of nominal (not adjusted for purchasing power) dollars.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Define Passive Strategy

A

Investment policy that avoids security analysis.

17
Q

Define Price of Risk

A

The ratio of portfolio risk premium to variance.

18
Q

Define Probability Distribution of HPR

A

List of possible outcomes with associated probabilities.

19
Q

Define Real Interest Rate

A

The excess of the interest rate over the inflation rate. The growth rate of purchasing power derived from an investment.

20
Q

Define Risk Aversion

A

Reluctance to accept risk.

21
Q

Define Risk-Free Rate

A

The rate of return that can be earned with certainty.

22
Q

Define Risk Premium

A

An expected return in excess of that on risk-free securities.

23
Q

Define Scenario Analysis of HPR

A

Process of devising a list of possible economic scenarios and specifying the likelihood of each one, as well as the HPR that will be realized in each case.

24
Q

Define Sharpe Ratio (Reward-To-Volatility)

A

Ratio of portfolio risk premium to standard deviation.

25
Q

Define Skew

A

Measure of the asymmetry of a probability distribution.

26
Q

Define Standard Deviation

A

The square root of the variance.

27
Q

Define Value At Risk (VaR)

A

Measure of the downside risk. The worst loss that will be suffered with a given probability, often 5%.

28
Q

Define Variance

A

The expected value of the squared deviation from the mean.

29
Q

What is the other name for geometric returns?

A

Time-weighted average return

30
Q

Why is the effective rate of return used?

A

Because APR ignores compounding.

31
Q

In scenario analysis, what is the ‘surprise’ return?

A

The difference between the actual return and the expected return.

32
Q

What is the market price of risk?

A

The price of risk of the market index portfolio, which reflects the risk aversion of the average investor.

33
Q

What three types of securities do money market mutual funds typically hold?

A
  • Treasury bills
  • Bank CDs
  • Commercial Paper