Chapter 5 - Portfolio Theory Flashcards
Define Arithmetic Average
The sum of returns in each period divided by the number of periods.
Define Asset Allocation
Portfolio choice among broad investment classes.
Define Capital Allocation
The choice between risky and risk-free assets.
Define Capital Allocation Line (CAL)
Plot of risk-return combinations available by varying portfolio allocation between a risk-free asset and a risky portfolio.
Define Capital Market Line
The capital allocation line using the market index portfolio as the risky asset.
Define Complete Portfolio
The entire portfolio including risky and risk-free assets.
Define Dollar-Weighted Average Return
The internal rate of return on an investment.
Define Excess Return
Rate of return in excess of the risk-free rate.
Define Expected Return
The mean value of the distribution of HPR.
Define Geometric Average
The single per-period return that gives the same cumulative performance as the sequence of actual returns.
Define Holding-Period Return
Rate of return over a given investment period.
Define Inflation Rate
The rate at which prices are rising, measured as the rate of increase of the CPI.
Define Kurtosis
Measure of the fatness of the rails of a probability distribution relative to that of a normal distribution. Indicates likelihood of extreme outcomes.
Define Mean-Variance Analysis
Ranking portfolios by their Sharpe ratios.
Define Nominal Interest Rate
The interest rate in terms of nominal (not adjusted for purchasing power) dollars.