Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Vince CFA Formula > Cheat Sheet Portfolio Management > Flashcards

Cheat Sheet Portfolio Management Flashcards

You may prefer our related Brainscape-certified flashcards:
CFA flashcards
1
Q

Types of investors

Individual investor

A

Investment horizon
Varies by individual
Risk tolerance
Depends on the ability and willingness to take risk
Income needs
Depends on investment rationale
Liquidity needs
Varies by individual

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

Types of investors

Defined benefit (DB) pension plans

A

Investment horizon
Usually long term
Risk tolerance
High for longer investment horizon
Income needs
High for mature funds (payouts soon), low for growing funds.
Liquidity needs
Varies by plan maturity

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

Types of investors

Endowments & foundations

A

Investment horizon
Very long term
Risk tolerance
Typically high
Income needs
To meet spending commitments
Liquidity needs
Quite low

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

Types of investors

Banks

A

Investment horizon
Short term
Risk tolerance
Low
Income needs
Pay interest on deposits and operational expenses
Liquidity needs
High, to meet daily withdrawals

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

Types of investors

Insurance companies

A

Investment horizon
Short term for property & casualty (P&C), long term for life insurance
Risk tolerance
Low
Income needs
Low
Liquidity needs
High to meet claims

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

Types of investors

Investment companies

A

Investment horizon
Varies by fund
Risk tolerance
Varies by fund
Income needs
Varies by fund
Liquidity needs
High to meet redemptions

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

Types of investors

Sovereign wealth funds

A

Investment horizon
Varies by fund
Risk tolerance
Varies by fund
Income needs
Varies by fund
Liquidity needs
Varies by fund

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

Defined benefit (DB) vs defined contribution (DC) pension plans

Defined benefit (DB) plan

A

Defined benefit (DB) plan is where a company promises to makes a pre-defined future benefit payments to the employees. The company bears the investment risk.

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

Defined benefit (DB) vs defined contribution (DC) pension plans

Defined contribution (DC) plan

A

Defined contribution (DC) plan is where a company contributes an agreed amount to the plan and employees invest part of their wages to the plan. In a DC plan, investment and inflation risk is borne by the employee.

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

Risk aversion is the degree of an investor’s inability and unwillingness

Risk neutral

A

Risk neutral: an investor who is indifferent about the gamble or a guaranteed outcome, as the investor is only concerned about returns.

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

Risk aversion is the degree of an investor’s inability and unwillingness

Risk-seeking

A

Risk-seeking: an investor who prefers a gamble, where the indifference curve is downward sloping as the expected return decreases for higher levels of risk. This is uncommon.

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

Risk aversion is the degree of an investor’s inability and unwillingness

Risk averse

A

Risk averse: an investor who expects additional return for taking additional risks, i.e. the indifference curve is upward sloping. Most investors are risk averse, the degree of risk aversion varies. The steeper the indifference curve, the more risk averse they are.

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

Minimum variance portfolio

Minimum variance frontier is rate

A

Minimum variance frontier is a line combining all portfolios with a minimum level of risk given a rate of return.

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

Minimum variance portfolio

Global minimum variance portfolio

A

Global minimum variance portfolio is the portfolio with the lowest variance amongst the portfolio of all risky assets.

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

Minimum variance portfolio

efficient frontier

A

The efficient frontier is the part of the minimum variance frontier that is above the global minimum variance portfolio, since it gives the highest return for a given level of risk. Note that efficient frontier only consists of risky assets, there are no risk-free assets here.

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

Optimal investor portfolio

A

Optimal investor portfolio is the point where an investor’s indifference curve is tangential to the optimal CAL.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Systematic vs non-systematic risk

A

Systematic risk is a non-diversifiable, market risk. Investors should get compensated for taking on systematic risk.
Non-systematic risk is a local risk that can be diversified away, investors are not compensated for taking on this risk.
A risk-free asset has zero systematic and non-systematic risk.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Investment policy statements (IPS)

A

IPS is a written document detailing the portfolio construction process designed to satisfy a client’s investment objectives.

Major components of an IPS are:

Introduction
Statement of purpose
Statement of duties and responsibilities
Procedures
Investment objectives
Investment constraints
Investment guidelines
Evaluation of performance
Appendices

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Investment constraints

A

Time horizon
The longer the time horizon, the greater the ability to take risk and the lower the liquidity needs.

**Taxes **
Consider individual tax status, investment jurisdiction and tax treatment of various types of investment accounts.

Liquidity
Cash requirements varies by client and need to consider having a portion of assets in liquid investments.

Legal / regulatory
Consider if there are legal restrictions on investments or max percentage allocation on certain assets.

Unique circumstances
Usually individual constraints are present, such as avoid certain class of security or industry, or ethical preferences etc.

20
Q

The 6 main ESG investment approaches are:

A

Negative screening
Excludes certain practices, sectors or companies from a fund/portfolio based on a specific ESG criteria.

Positive screening
Includes certain practices, sectors or companies in a fund/portfolio based on a specific ESG criteria.

ESG integration
Refers to the practice of including material ESG factors in the investment process.

Thematic investing
Picks investment based on a single factor or theme, such as energy efficiency.

Engagement / active ownership
Achieving ESG objectives with financial returns using shareholder power to influence corporate behaviour.

Impact investing
Investments made with the intention of generating positive, measurement ESG impact along with financial return.

21
Q

The Behavioural Biases of Individuals

Conservatism bias (Cognitive errors)

A

Fail to incorporate new information that conflicts with their opinion. Slow to react as a consequence.

22
Q

The Behavioural Biases of Individuals

Confirmation bias (Cognitive errors)

A

Look for data that supports their view, ignore those that contradicts.

23
Q

The Behavioural Biases of Individuals

Representativeness bias (Cognitive errors)

A

Incorrectly classify new information based on past experiences.

24
Q

The Behavioural Biases of Individuals

Illusion of control bias (Cognitive errors)

A

People overestimate their ability to control or predict events.

25
Q

The Behavioural Biases of Individuals

Hindsight bias (Cognitive errors)

A

People believe past events would have been predictable.

26
Q

The Behavioural Biases of Individuals

Anchoring & adjustment bias (Cognitive errors)

A

An information processing bias where people relied too much on initial data, closely related to conservatism bias.

In conservatism bias, people overweight past information vs. new information, whilst anchoring & adjustment bias overweights on an anchored value.

27
Q

The Behavioural Biases of Individuals

Mental accounting bias (Cognitive errors)

A

People treat one sum of money differently from the other, i.e. “mental buckets”, when money is fundamental fungible.

28
Q

The Behavioural Biases of Individuals

Framing bias (Cognitive errors)

A

People answer questions differently depending on how it is framed.

29
Q

The Behavioural Biases of Individuals

Availability bias (Cognitive errors)

A

People perceive outcomes that are more easily remembered are more likely.

30
Q

The Behavioural Biases of Individuals

Loss aversion bias (Emotional biases)

A

Strongly prefer avoiding losses than achieving gains.

31
Q

The Behavioural Biases of Individuals

Loss aversion bias (Emotional biases)

A

Strongly prefer avoiding losses than achieving gains.

32
Q

The Behavioural Biases of Individuals

Overconfidence bias (Emotional biases)

A

Overestimate own abilities.

33
Q

The Behavioural Biases of Individuals

Self control bias (Emotional biases)

A

Lack discipline to act or make decisions for long term goals.

34
Q

The Behavioural Biases of Individuals

Status quo bias (Emotional biases)

A

Rather do nothing than make a change.

35
Q

The Behavioural Biases of Individuals

Endowment bias (Emotional biases)

A

Value assets more when they hold rights to it than when they don’t.

36
Q

The Behavioural Biases of Individuals

Regret aversion bias (Emotional biases)

A

Avoid making decisions that could turn out badly.

37
Q

Risk management framework

Risk governance

A

Risk governance: a top-down process that defines risk tolerance and provides guidance to align risk with company goals

  • Risk identification and measurement
  • Risk infrastructure
  • Defined policies and processes
  • Risk monitoring, mitigation and management
  • Communications
  • Strategic analysis or integration
38
Q

Risk management framework

Risk tolerance

A

Risk tolerance: what risks are acceptable and how much risk should be taken

39
Q

Risk management framework

Risk budgeting

A

Risk budgeting: how and where the risks are taken and quantifies tolerable risk by specific metrics

40
Q

Risk management framework

Financial risk

A

Financial risk: risks that originate from financial markets such as change in interest rates. 3 major types of financial risk are market risk, credit risk and liquidity risks.

41
Q

Risk management framework

Non-financial risk

A

Non-financial risk: risks that arise from within an entity or externally. Examples of non-financial risks are: operational risk, solvency risk, settlement risk, legal risk, regulatory, accounting and tax risk, model risk, tail risk, political risk.

42
Q

Risk management framework

Methods of risk measurements

A

Methods of risk measurements: standard deviation, beta, duration, delta, gamma, VaR, CVaR, etc.

43
Q

Risk management framework

Methods of risk modification

A

Methods of risk modification: risk prevention/avoidance, risk acceptance (self-insurance and diversification), risk transfer (insurance), risk shifting/modification (via derivatives).

44
Q

Security Market Line (SML)

A

CAPM-Konzept zur Bewertung von Anlagen. Zeigt die erwartete Rendite einer Anlage als Funktion ihres systematischen Risikos (Beta). Intercept: Risikofreier Zinssatz. Zeigt, ob eine Anlage über- oder unterbewertet ist;
unter der Linie = überbewertet, über der Linie = unterbewertet.

45
Q

Security Characteristic Line (SCL)

A

Regressionsanalyse zur Ermittlung der Beziehung einer Anlage zum Markt. Zeigt die exzessive Rendite der Anlage im Verhältnis zur exzessiven Rendite des Marktes. Intercept: Jensen’s Alpha. Steigung ist Beta; Alpha zeigt Überoder Unterperformance im Vergleich zur erwarteten Rendite.

46
Q

Capital Allocation Line (CAL)

A

Darstellung der Risiko-Rendite- Kombination eines Portfolios aus risikofreiem und risikobehaftetem Investment. Zeigt alle möglichen
Risiko-Rendite-Kombinationen von risikofreien und risikobehafteten Anlagen. Steigung entspricht der Sharpe-Ratio des risikobehafteten
Portfolios.

47
Q

Capital Market Line (CML)

A

Spezielle Form der CAL im CAPM-Kontext, bei der das Marktportfolio das
risikobehaftete Investment ist. Zeigt die erwarteten Renditen effizienter
Portfolios, die das Marktportfolio und die risikofreie Anlage kombinieren. Intercept: Risikofreier Zinssatz. Verwendet das Marktportfolio; zeigt
die effizientesten Risiko-Rendite-Kombinationen.

Vince CFA Formula (18 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions