Determining the Optimal Portfolio Flashcards

(33 cards)

1
Q

what is the simplest way to control risk in the portfolio

A

change the fraction invested in risk free assets versus the fraction invested in risky assets

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2
Q

where does the capital allocation line meet the efficient frontier

A

the tangency point

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3
Q

the tangency point gives us what type of slope for the CAL

A

highest possible slope

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4
Q

the tangency point is what point on the efficient frontier

A

the highest possible return to risk ratio

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5
Q

what 3 factors should determine the optimal portfolio for an investor

A
  1. The efficient frontier of all risky assets
  2. The Capital Allocation Line
  3. Investor’s indifference curves
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6
Q

what can the slope of the indifference curve tell us

A

about risk aversion

with more risk, a person would want more return

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7
Q

which is the optimal portfolio in relation to where CAL and indifference curves intersect

A

highest possible indifference curve that intersects with the CAL

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8
Q

does everyone have the same optimal portfolio

A

no because everyone has different expectations

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9
Q

Features of an Investment Policy Statement

A
  1. Risk Objectives
  2. Return Objectives
  3. Liquidity Objectives
  4. Time Horizon Objectives
  5. Tax Concerns
  6. Legal and Regulatory Factors
  7. Unique Conditions
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10
Q

what is absolute risk aversion

A

no loss of capital

or lose no more than a certian % of cpaital

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11
Q

how is capital at risk stated

A

in probability terms - VALUE AT RISK

eg 95% probability of a loss no more than 13% in a 12 month period

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12
Q

what is a relative risk objective

A

relate risk to a benchmark eg s&p or LIBOR

or in realtion to a liabilty

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13
Q

what is an example of risk relative to a liability

A

trying to meet pension payments as they come due

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14
Q

two types of risk objectives

A

relative
absolute

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15
Q

what two things impact risk tolerance

A

willingness to take risk
ability to bear risk

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16
Q

what affects willingness to take risk

A

personality type
confidence
independent thinking

17
Q

what affects ability to bear risk

A

time horizon
expected income
wealth relative to liabilities

18
Q

what are the two types of return objectives

A

absolute
relative

19
Q

two types of absolute return objectives

A

nominal and real

20
Q

what are relative return objectives

A

claim to outperform the benchmark, or other portfolio managers

21
Q

why does being realistic come into account when considering return objective

A

given the risk you are taking, you have to be realistic with return objectives

22
Q

investors usually want to be told what type of return rate when investing

A

real rate

know the numbers

23
Q

fund managers usually give what type of return objectives

24
Q

why do fund managers have to consider liquidity

A

will withdrawls ve needed at short notice

25
example of a fund where liquidity needs are more predictable
pension
26
what is one of the least liquid assets
real estate you cannot sell overnight transaction costs needed to turn real estate into cash
27
what type of funds are less predictible in terms of liquidity
insurance companies claim need to be paid - how much to keep in liquid assets
28
what do we need to consider when it comes to time horizon objectives
when will the funds be withdrawn
29
what taxes might the investor consider
income tax capital gains tax pension funds are tax exempt
30
examples of legal and regulatory factors they might need to consider
insider trading is illegal restrictions on short sales restriction in some countries of amount of assets held overseas restriction in quality of assets (no junk assets)
31
examples of unique conditions that may effect investment decision
ehtical values eg no child labour religion eg no gambling person preferences eg environmental sustainability
32
does a longer time horizon mean more or less ability to bear risk
more more time to recover
33
what should a person avoid investing in to diversify
their own industry that they work in home market