Chapter 5-Risk Measurement Flashcards
Standard deviation formula
Example
Look at a fund’s ___ Standard Deviation (SD) compared to its peer group or category. Large cap blend funds would have the ___ as an appropriate yardstick.
Bond funds would have the ___ as a yardstick.
3-year; S&P 500; Barclays Aggregate Bond Index
The most common beta benchmark for common stocks is ___.
The most common beta benchmark for bonds is ___.
The higher a fund’s beta is over ___, the more volatile it’s performance.
The S&P 500; the Barclays Aggregate Bond Index; 1.0
Beta will not reveal much about funds with ___, such as those in a ____
Highly specialized holdings; particular industry or sector.
R-squared measures portfolio ___ to a benchmark; ___ in the case of large US stocks and ___ in the case of domestic bonds.
A fund’s R-squared can range from ___; the closer to ___, the stronger the ____.
R-squared is often used to check the the validity of a fund’s ___.
Performance correlation; S&P 500; 10-year Treasury bonds
0-100; performance correlation
Beta
As a general rule, unless a fund’s or ETF’s R-squared is between ___, disregard its ___.
If a stock or fund has an R-squared value of close to 100%, but has a beta below 1, it is most likely offering ____ returns.
75-100; beta
higher risk-adjusted
Alpha aka ___’s alpha…
Jensen’s; measures the difference between expected and actual returns of a fund based on its beta.
A positive alpha is ___ and is a way of evaluating a fund’s ___
Good; management
To compute alpha, you need to know …
- 90-day Tbill return (risk free return)
- Fund’s return
- Fund’s beta
- Return of appropriate index or market
- Fund’s R-squared
Alpha is only considered valid if the portfolio has a ___
R-squared number between 75-100.
Sharpe ratio measures a fund’s ____ using ___.
Unlike alpha, the Sharpe ratio measures returns in any ___ or ___ category, not just those similar to the S&P 500.
The higher the Sharpe ratio, the ____ given its risk level.
Risk-adjusted returns; standard deviation
fixed income; equity;
Better the fund’s returns
Calculating the Sharpe ratio is done by…
Subtracting the 90-day T-bill rate from the fund’s returns. Then dividing the result by SD.
Sharpe ratio advantages are: 1) it works in ___ 2) it works in any ___… flat, ___, or ___
3) it’s calculated the same regardless of ___ category, whereas alpha relies on ___ that can be based on different indexes or benchmarks
4) can be used to compare similar or
Wildly different ___
All fund categories;
Market; bull, bear
Fund; beta
Funds
Duration, first developed in 1938 by ____ measures ___
Generally, duration ___ with price maturity, falls as coupon payments grow ____, and falls as yields (coupon rates) ___.
Duration can be defined as the approximate percentage change in the bond’s price for ____
Frederick Macaulay; bond price volatility
Rises; more frequent; rise
A 100-point basis point change in interest rates
When a rating service is considering changing a bond rating, they often signal this intention to the investment community by ____.
Putting the bond on Credit Watch (standard & poor), Under Review (Moody’s), or on Rating Watch (Fitch).
Since 1993, the long-term default rate for domestic corporate ____ has averaged between ____ annually.
Junk bonds; 4.5-5%
Investors should avoid ____ funds with R-squared of 75-100.
There’s no reason to pay moderate to high ___ if the portfolio is mimicking results of a low cost, ____ fund.
Actively managed
Management fees; passively managed index
It is rare for a fund manager to have ____ over multiple 5-, 10-, 20-year periods.
Positive alpha
A bond or bond fund whose duration is 10 years will ___ by ___ if interest rates fall 1% and will ___ by ___ if interest rates increase 1%.
Also, a bond or bond fund whose duration is 5 years will ___ by ___ if interest rates fall 1.5% and will ___ by ___ if interest rates increase .5%
Increase in value 10%; Decrease in value by 10%
Increase in value by 7.5%; decrease in value by 2.5%
There is nothing wrong with having 15% of a fund in ____ as long as the investor knows these ___ bonds will behave more like stocks than bonds.
A ____ fund should be considered ___ bonds and ___ stocks.
Junk bonds ; high-yield
Junk bond; 40% and 60%
The wider the range of historical returns, the ___.
the more predictive standard deviation becomes …. this is my best guess since nothing in Chapter 5 addresses this prompt.
