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PORTFOLIO MANAGEMENT > EVERYTHING > Flashcards

EVERYTHING Flashcards

1
Q

portfolio management

A

the professional management of securities/assets (real or financial to meet pre-specified investment objectives set by investors

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2
Q

real assets

A

land,building,machines and knowledge of service

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3
Q

financial assets

A

stocks, bonds, derivatives or any combination of these assets. no more than thin sheets of paper

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4
Q

pre-specified investment objectives

A

based on an investor’s need and risk tolerance - achievable and for a fixed time horizon

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5
Q

where are securities traded?

A
  • equity markets
  • fixed income markets
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6
Q

equity markets

A

exchanges: TSE, NYSE, NASDAQ, american stock exchange

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7
Q

market indexes

A

hypothetical portfolio that represents financial markets (or a particular sector)
Canada: S&P 500/TSX composite index (market-value index)
US: S&P500, dow jones 30 industrial average (DJIA)

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8
Q

fixed-income markets

A

Canada and US
exchanges: no exchanges but over-the-counter (OTC)
barclay’s capital bond index: (corporate&gov bonds, MBS, treasuries,etc.)
In fixed income markets, bonds are the most common security traded. these are solely interest-earning investments.

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9
Q

depository receipts

A

certificates traded in one country’s market that represent ownership in shares of foreign company

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10
Q

mutual funds

A

-money pooled from different investors for the purpose of investing in securities as equity fixed income and derivatives.
-you can only trade them at 4pm. one price/day
-disclosed every quarter

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11
Q

open-ended funds

A

redeemable at any time.An Open-End Fund is a type of investment vehicle that uses pooled assets, allowing for ongoing new contributions and withdrawals from investors1. It is a diversified portfolio of pooled investor money that can issue an unlimited number of shares1. The fund sponsor sells shares directly to investors and redeems them as well1. These shares are priced daily based on their current net asset value (NAV).

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12
Q

exchange traded funds

A

a combination of mutual funds and stocks. tracks the performance of an index of share returns for a particular country or sector.

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13
Q

how are equities traded?

A

securities are bought and sold in two main markets. primary and secondary

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14
Q

primary market

A

firms raise capital by issuing new securities like equities and bonds. IPOs and seasoned new issues (new equity offered by a company that already has floated equity)

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15
Q

secondary market

A

purchase and sale of already issued securities among investors done (e.g. stock market)

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16
Q

4 types of secondary markets

A
  • direct search markets
  • brokered markets
  • dealers market
    -auction markets
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17
Q

direct search market

A

buyers and sellers find each other, directly characterized by limited participation, low-prices, and non-standard goods

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18
Q

brokered markets

A

brokers facilitate buyers and sellers meetings based on comissions or brokerage

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19
Q

dealers market

A

dealers buy securities for their own accounts and sell these securities later for profit. (price bought minus price sold)

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20
Q

auction markets

A

buyers and sellers converge at one place and bid for securities

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21
Q

arithmetic average

A

does not given equivalent per period returns

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22
Q

geometric average

A

gives equivalent per period returns

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23
Q

market orders

A

execute at current market (bid/ask) prices. adv. order execution guaranteed (immediate) disadv. uncertainty about execution price.

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24
Q

limit order

A

allows investors to buy/sell securities at a specific price (or better)
adv: max profits - orders to buy(sell) at maximum(minimum) price
no oversight
time bound execution
disadv: no protection against loses

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25
Q

stop orders

A

help minimize losses, trades will not be executed unless price hits the “stop price”

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26
Q

trading on margins

A

-margin accounts allow investors to borrow money to invest.
- refers to collateral against the fall in value of investments
- investors need to provide security whenever their account values fall below the amount of money they have borrowed
- margin ratio = MV - loan/MV

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27
Q

margin call

A

if the margin of your account falls below a certain level, (the maintenance margin) the broker will issue a margin call. you’ll need to deposit more money or sell securities to meet the margin requirement.

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28
Q

probability theory

A
  • assume stock returns are continuous random variables
    -how is this probability distributed? generated from the probability distribution functions
  • thus random variables are completely characterized by their PDFs
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29
Q

mean variance criterion

A

the expected (mean) return- standard deviation trade-off is equivalently known as mean-variance criterion.
- asset A dominates asset B if:
E(ra)>E(rb) and Oa=Ob

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30
Q

portfolio construction process

A
  1. specify the return characteristics of all securities (E(r), O, covariance)
  2. calculate the optimal risky portfolio (max sharpe ratio)
  3. allocate funds b/w the optimal risky portfolio and the risk-free asset
    -determine the level of risk aversion
    - calculate the fraction of the complete portfolio allocated to optimal risky portfolio and to risk-free asset (T-bill)
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31
Q

Markowitz Model

A

-his model is “step one”. that is, identifying the efficient set of portfolios (efficient frontier)
- efficient portfolio = minimum variance portfolio for a given level of expected return & correlation structure
- any (mean-variance) investor should choose an efficient portfolio to benefit from diversification
-a portfolio manager can form a set of efficient portfolios by running an optimization program over given characteristics of securities.

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32
Q

markowitz steps

A

step 1: risk-return opportunities available to the investor. these are summarized by the minimum-variance frontier
step 2: search for the “optimal risk” portfolio P with highest sharpe ratio
step 3: choose appropriate mix of ORP and T-bills to form OCP
- having formed the efficient frontier, we choose a portfolio P which is at the tangency point of the efficient fronteir and with the highest sharpe ratio

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33
Q

two fund separation theorem

A
  • suggests you can separate the problem of investing into 2 funds:
  • optimal risky portfolio
  • risk free asset
    weight of an asset in the optimal risky portfolio is the weight of that asset in the market portfolio
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34
Q

capital asset pricing model (CAPM)

A
  • CAPM helps to fill in the gap about what should be expected returns of the assets
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34
Q

market price of risk

A

quantifies the marginal return that investors demand to bear one unit of portfolio risk

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34
Q

CAPM assumptions

A
  1. many small investors w endowment (initial wealth) that is small compared to total wealth in the economy. investors are price takers not price makers
  2. identical holding periods for all investors for simplicity
  3. can invest only in publicly-traded financial assets, such as stocks, bonds, and risk free assets (zero net supply)
  4. no taxes and transaction costs
  5. investors are rationale - mean variance optimizers
  6. investors have homogenous expectations and beliefs
    - these ensure that the frontier is the same for every investor, and all investors optimal portfolio have a fraction of initial wealth invested in risk-free asset and rest in identical ORP
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35
Q

CAPM application

A

step 1: identify your “optimal risky portfolio” or market portfolio - commonly used proxy for the market portfolio is value weighted stock portfolio
step 2: get the historical data of prices (incl. dividends) for stocks, market index, and risk-free assets
step 3: calculate historical returns of these assets
setp 4: regress historical returns of the stocks on market portfolio returns to get beta coefficient for each stock
step 5: apply capm formula

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36
Q

security market line

A

works as a benchmark to assess fair expected return on a risky asset (anything above the line you buy)

37
Q

beta

A

Beta (β) is a measure of a stock’s volatility in relation to the overall market. By definition, the market, such as the S&P 500 Index, has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market

38
Q

beta trading strategy

A
  1. estimate beta for all stocks traded in the us
  2. rank all stocks based on beta and divide stocks into 5 groups every month
  3. create equally weighted or value weighted portfolios each month
  4. balance each month (buy all at the beginning and sell all at the end)
  5. repeat this each month for as long as your investment horizon
39
Q

low beta risks

A
  • great for risk averse investors
  • however could be non-diversified or concentrated or liquidity risks
40
Q

efficient market hypothesis

A
  • claims that stock prices already reflect all available information
    -EMH argues that prices are determined rationally, then only “new info” will cause them to change
  • this new info should be unpredictable in an efficient market
41
Q

three versions of EMH

A
  • strong form
  • semi strong form
  • weak form
42
Q

strong form

A
  • predicts you cannot predict stock prices at all
  • relies on three assumptions: new info is random, instantaneous price adjustment, perfect competition
  • expected returns will drive away inefficiency in market
  • predicts stock picking is a useless exercise
43
Q

semi-strong form

A

asserts that all publicly available info regarding the firm’s future prospect are already incorporated in stock price
- fundamental analysis is no use

44
Q

weak form

A

asserts that stock prices already reflect all info that can be derived by examining market trading data such as historical prices, volumes
- technical analysis is of no use to predict future stock values

45
Q

technical analysis

A

security analysis based on the historical market data, primarily historical stock values, trade volumnes
- aim to find recurrent and predictable patterns in the stock prices
- all analysis based on two key assumptions:
1. history repeats itself
2. price adjustment mechanism is slow
- these are opposite to EMH

46
Q

fundamental analysis

A
  • security analysis based on the firm specific info as well as other publicly available info.
  • this info set includes earnings and dividends, expectations of future interest rates and risk evaluation of the firm
    can calculate intrinsic value and compare with the price
    find firm’s that are better than everyone else’s estimate
47
Q

active investing

A

tries to beat the market to generate returns. if you believe to market is inefficient

48
Q

passive investing

A

tries to get the same returns as the market. if you believe the market is efficient

49
Q

empirical test of weak-form EMH

A

short horizon returns: these are tests for the efficacy of technical analysis
serial correlation returns: tests if past stock returns are correlated with current stock returns
positive serial correlation: momentum
negative serial correlation: reversal

50
Q

momentum

A

-the idea that if stocks are high performers in the past they will continue to be
- based on 3-12 month holding period returns
- based on momentum effect

51
Q

reversal portfolio

A

long-term horizon: returns in the lt have found to have been pronounced neg serial correlation. might have to do with overreaction to positive serial correlations in the short/intermediate term
-short winners and long losers

52
Q

empirical test of semi-strong form EMH

A

empirical test related to semi-strong form
- small size effect
- high book/ market effect
- interaction of size and value effect
- January effect
- post-earning annoucement
-day/night effect
- halloween effect (nov sell may)
- neglected firm effect
-day of week effect: mondays bad, wednesdays and fridays good
- low P/E effect

53
Q

treynor ratio

A

excess return per unit of systematic risk
return-rf/beta
higher is better

54
Q

information ratio

A

alpha of portfolio (in excess of benchmark portfolio) by non-systematic risk
return-benchmark/sd of the return difference
higher implies a better portfolio manager who’s achieving return higher than benchmark

55
Q

multifactor model

A
  • allows for multiple sources of risk
  • uses other factors in addition to market returns
56
Q

fama french model

A

best known approach
observes both small cap outperform large cap (SMB) and high b/m outperform low b/m (HML)
explains 90% of stock returns

57
Q

carhart 4 factor

A

market, smb, hml, mom

58
Q

ps 5 factor

A

add liquidity as a factor, less liquid outperform highly liquid

59
Q

fama-french 5 factor model

A

add profitability(h-l) and investments (low-high) to normal FF3

60
Q

morgan stanley’s factor model

A

factors
- gdp growth
- lt interest rate
- foreign exchange
- market factor
- commodities or oil price index

61
Q

what is factor investing?

A

investment strategy that uses certain characteristics of securities that are important in explaining risk and return relationship
popular factors:
- small size
- value
- winner(momentum)
- low beta (or low volatility)
-market

62
Q

top-down

A

This approach starts with the broader economy, analyzes the macroeconomic factors, and targets specific industries that perform well against the economic backdrop. From there, the top-down investor selects companies within the industry. starts with asset allocation

63
Q

bottom-up

A

This approach focuses on analyzing individual stocks and de-emphasizes the significance of macroeconomic and market cycles2. Bottom-up investors focus on a specific company and its fundamentals, whereas top-down investors focus on the industry and economy. starts with security analysis

64
Q

middle out

A

This term is not commonly used in portfolio construction. It might refer to a balanced approach that considers both macroeconomic (top-down) and company-specific (bottom-up) factors

65
Q

buy and hold

A

This is a passive investment strategy where an investor buys stocks (or other types of securities such as ETFs) and holds them for a long period regardless of fluctuations in the market. The goal is to benefit from long-term gains in the market

66
Q

asset allocation construction

A

This refers to the ongoing process of allocating and reallocating money within an investment portfolio to different asset classes. The three main asset classes—equity, fixed-income, and cash and equivalents—all have different levels of risk and expected return.

67
Q

systematic risk

A

This is the risk inherent to the entire market or market segment. It’s also known as “non-diversifiable risk” or “market risk” since it impacts the entire asset class.

68
Q

non-systematic risk

A

This is the risk associated with a specific company or industry. It’s also known as “specific risk”, “diversifiable risk”, “idiosyncratic risk”, or “residual risk”. reduce through diversification.

69
Q

what does an ETF do

A

tracks the performance of an index of share returns for a particular country or industry sector

70
Q

what indices are market-value weighted?

A

NYSE and S&P500

71
Q

how much can you lose when you short a stock?

A

unlimited, as short sellers lose money when the price rises

72
Q

what are mutual fund advantages?

A

they offer a variety of investments, they offer small investors the benefits of diversification, however the costs are high

73
Q

equity mutual funds

A

they invest primarily in stock, they may hold fixed income securities as well
most hold money market securities as well as stock, two types of equity funds are income funds and growth funds

74
Q

How do we know if a stock is over priced in the CAPM model?

A

A security is over priced if the actual return is less than the calculated expected return

75
Q

what is the variance of a portfolio of risky securities?

A

the weighted sum of the securities’ variances and covariances

76
Q

the efficient frontier of risky assets is

A

the portion of the investment opportunity set that lies above the gloabl minimum variance portfolio

77
Q

when is diversification most effective?

A

when securities returns are negatively correlated

78
Q

portfolio theory as described by Markowitz is most concerned with what?

A

the effect of diversification on portfolio risk

79
Q

what happens to unsystematic risk as a portfolio diversifies?

A

it reaches 0

80
Q

in a signle factor model, what is the return on a stock related to

A

firm specific events and market events

81
Q

security returns are…

A

based on macro and firm specific events, and are usually positively correlated

82
Q

if a portfolio manager consistently obtains a high sharpe ratio, the manager’s forecasting ability is ___

A

above average

83
Q

why have risk adjusted mutual funds decreased in popularity?

A

because in nearly efficient markets, it is extremely difficult for portfolio managers to outperform the market. as well the measure usually results in negative performance results for the portfolio managers.

84
Q

the security market line is…

A

the line that represents the expected return-beta relationship

85
Q

alpha

A

In the Capital Asset Pricing Model (CAPM), Alpha is a measure of the performance of an investment as compared to a suitable benchmark index. if the security is fairly priced, alpha is 0

86
Q

the expect return-beta relationship

A

is the most familiar expression of the CAPM to practitioners. refers to the way in which the covariance between the returns on a stock and returns on the market measures the contribution of the stock to the variance of the market portfolio, which is beta. assumes that investors hold well-diversified portfolios.

87
Q

value effect

A

found that firms with low P/e ratios earned higher returns than firms with high p/e ratios

88
Q

abnormal return

A

=ann. return - (rf +beta(market return-rf))
if positive there was good news, if negative there was bad news

89
Q
A
90
Q
A
91
Q
A

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