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Investments > Exam 3 > Flashcards

Exam 3 Flashcards

1
Q

Asset Allocation

A

How an investor spreads portfolio dollars among assets.

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2
Q

Correlation

A

The tendency of the returns on two assets to move together.

Moving up and down together - Positive correlation
Moving opposite directions together - Negative correlation

The lower the correlation, the greater the gain from diversification.

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3
Q

Efficient Portfolio

A

A portfolio that offers the highest return for its level of risk. A portfolio plotted above the minimum variance portfolio.

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4
Q

Portfolio

A

Group of assets such as stocks and bonds held by an investor.

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5
Q

Investment Opportunity Set

A

Collection of possible risk-return combinations available from portfolios of individual assets.

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6
Q

Markowitz Efficient Frontier

A

The set of portfolios with the maximum return for a given standard deviation.

The set of risky portfolios with the minimum standard deviation for a given return.

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7
Q

Principle of Diversification

A

Spreading an investment across a number of assets will eliminate some, but not all, of the risk.

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8
Q

Portfolio Variance Calculation (Example of Three stocks)

A

(Squared % invested stock A x Squared standard deviation stock A) +
(Squared % invested stock B x Squared standard deviation stock B) +
(Squared % invested stock C x Squared standard deviation stock C) +
(2 x % Invested Stock A x % Invested Stock B x % Invested Stock C x Standard deviation A x Standard Deviation B x Standard Deviation C x Correlation)

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9
Q

Systematic Risk

A

Affects almost all assets in the economy at least to some extent

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10
Q

Unsystematic Risk

A

Affects only a small number of assets

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11
Q

Unexpected Return

A

Total return - Expected return

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12
Q

Beta coefficient

A

Measure of the relative systematic risk of an asset. Assets with betas larger (smaller) than 1 have more (less) systematic risk than average

Beta of 1 = average asset

Increased Beta, while it means greater systematic risk, should also normally indicate increased expected returns

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13
Q

Capital Asset Pricing Model

A

A theory of risk and return for securities in a competitive capital market. States that the expected return for an asset is dependent on 3 things:

  1. Pure time value of money (risk-free rate)
  2. Reward for bearing systematic risk (Market risk premium)
  3. Amount of systematic risk (asset Beta)
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14
Q

Security Market Line

A

Graphical representation of the linear relationship between systematic risk and expected return in financial markets.

Expected Return = Risk-Free Rate + (Market Risk Premium x Asset Beta)

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15
Q

Systematic Risk

A

Affects almost all assets in the economy at least to some extent (also called market risk)

Since it effects almost all assets, it can’t be diversified away

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16
Q

Covariance

A

A measure of the tendency of two things to move together

Calculated by taking the sum of the products of the deviations divided by n-1

Can be translated into correlation by dividing it by the product of the asset and market standard deviations

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17
Q

Market Risk Premium

A

The risk premium on a portfolio made up of everything in the market

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18
Q

Standard Deviation vs Beta as measurements of risk

A

While standard deviation is a measurement of total risk (high standard deviation = high total risk), Beta measures only systematic risk (Beta > 1 is high risk). So if there’s a difference in comparison, it must have something to do with unsystematic risk.

Ex: Stock A has a lower Beta than Stock B but also has a higher standard deviation. That would mean stock A has less systematic risk but more unsystematic risk.

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19
Q

Portfolio Beta Calculation

A

Sum of each individual (Asset weight x Asset Beta) in the portfolio

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20
Q

Reward to Risk Ratio (Definition and Equation)

A

The risk premium “per unit” of systematic risk

(New Expected Return - Old Expected Return)/Beta

You want a higher Reward to Risk Ratio

Must be the same for all assets in a competitive market

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21
Q

Beta and market sensitivity

A

Higher beta is more market sensitive, lower is less

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22
Q

Information Ratio

A

Alpha divided by tracking error.

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23
Q

Jensen’s Alpha

A

Actual portfolio return - [Risk free rate + ((Actual return - risk-free rate) x Beta)]

24
Q

Performance Evaluation

A

The assessment of how well a money manager achieves a balance between high returns and acceptable risks

25
Q

Raw Return

A

States the total percentage return on an investment with no adjustment for risk or comparison to any benchmark.

26
Q

R-Squared

A

A portfolio’s or security’s squared correlation to the market or benchmark. Represents the percentage of the fund’s movement that can be explained by movements in the market.

27
Q

Sharpe Ratio

A

Measures investment performance as the ratio of portfolio risk premium over portfolio return standard deviation. Looks at total risk.

(Raw Total Return - Risk Free Return)/Standard Deviation

28
Q

Investment Risk Management

A

Concerns a money manager’s control over investment risks, usually with respect to potential short-run losses.

29
Q

Treynor Ratio

A

Measures investment performance as the ratio of portfolio risk premium over portfolio beta. Looks at systematic risk.

(Raw Total Return - Risk Free Return)/Beta

30
Q

Normal Distribution

A

A statistical model for assessing probabilities related to many phenomena, including security returns.

31
Q

10K

A

File submitted to SEC annually, including balance sheet, income statement, and cash flow statement

32
Q

10Q

A

File submitted to SEC quarterly, except on quarter where 10K is submitted, including balance sheet, income statement, and cash flow statement.

33
Q

Regulation FD (Fair Disclosure)

A

Requires companies making a public disclosure of material non- public information to do so fairly without preferential recipients.

34
Q

Material Nonpublic Information

A

Any information that could reason- ably be expected to affect the price of a security

35
Q

Balance Sheet

A

Accounting statement that provides a snapshot view of a company’s assets and liabilities on a particular date.

36
Q

Income Statement

A

Summary statement of a firm’s revenues and expenses over a specific accounting period, usually a quarter or a year

37
Q

Cash Flow Statement

A

Analysis of a firm’s sources and uses of cash over the accounting period, summarizing operating, investing, and financing cash flows.

38
Q

Current Asset

A

Current assets are cash or items that will be converted to cash or be used within a year

Ex: Inventory, supplies, materials, accounts receiveable

39
Q

Fixed Asset

A

Fixed assets have an expected life longer than one year and are used in normal business operations.

Tangible (property, plant, equipment)
Intangible (rights, patents, licenses)

40
Q

Equity

A

Ownership interest in the company

Paid-In Capital: Form of equity which represents the amount received by the company from issuing common stock
Retained earnings: Accumulated income not paid out as dividends but instead used to finance company growth.

41
Q

Income

A

The difference between a company’s revenues and expenses, used to pay dividends to stockholders or kept as retained earnings within the company to finance future growth.

42
Q

Net Income Equation

A

Net Income = Dividends + Retained earnings

43
Q

Operating Cash Flow

A

Cash generated by a firm’s normal business operations

Different than Net Income because it does include noncash things like depreciation

44
Q

Investment Cash Flow

A

Cash flow resulting from pur- chases and sales of fixed assets and investments.

45
Q

Financing Cash Flow

A

Cash flow originating from the issuance or repurchase of securities and the payment of dividends

46
Q

Gross Margin Ratio

A

Gross Profit/Net Sales

47
Q

Operating Margin Ratio

A

Operating Income/Net Sales

48
Q

Return on Assets (ROA)

A

Net Income/Total Assets

49
Q

Return on Equity (ROE)

A

Net Income/Shareholder Equity

50
Q

Book Value Per Share (BVPS)

A

Shareholder Equity/Shares Outstanding

51
Q

Earnings Per Share (EPS)

A

Net Income/Shares Outstanding

52
Q

Cash Flow Per Share (CFPS)

A

Operating Cash Flow/Shares Outstanding

53
Q

Price-Book (P/B) Ratio

A

Stock Price/BVPS

54
Q

Price-Earnings (P/E) Ratio

A

Stock Price/EPS

55
Q

Price-Cash Flow (P/CF) Ratio

A

Stock Price/CFPS

56
Q

Market Risk Premium

A

Expected Market Return - Risk-Free Rate

57
Q

In the Capital Asset Pricing Model (CAPM), what is the return for an asset with a Beta of 1?

A

The market return

Investments (3 decks)

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