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FIN4050 - Portfolio Management Theory > Exam II > Flashcards

Exam II Flashcards

1
Q

What is the generic yearly long-term return for stocks?

A

9-10%

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2
Q

What does the Gerald Loeb faction of investors believe?

A

Put all your eggs in one basket

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3
Q

What does the Andrew Tobias faction of investors believe?

A

Don’t put all your eggs in one basket, it might have a hole in it

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4
Q

What are the benefits of owning more stocks?

A
  • More stocks you own, the more likely one will be a tenbagger
  • The more stocks you own, the more flexibility you have to rotate funds
  • Spreading your stocks around several categories can minimize downside risk
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5
Q

What does Peter Lynch refer to when he says “Watering the weeds, and pulling the flowers?”

A

When people sell their winning stocks and holding onto losers

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6
Q

What does Lynch want investors to convince themselves, and what does he want to banish?

A

Convince yourself, “when I’m down 25% I’m a buyer” and banish “when I’m down 25% I’m a seller”

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7
Q

What trading tool is Peter Lynch not a fan of?

A

Stop losses / Stop orders, they turn positions into automatic losers

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8
Q

When are the two best times when bargains can be found in the market?

A
  • October through December
  • During market collapses
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9
Q

Why is the holiday season the time period with the greatest drops?

A
  • Tax harvesting
  • Liquidating for holidays
  • Cleaning up portfolios for review
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10
Q

Why might it be a good idea to buy during a stock market collapse?

A

Because although the stock market may implode, the fundamentals and business of the firms are still healthy

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11
Q

What is the drumbeat affect?

A

Being convinced to make buying or selling decisions by surrounding noise on the street and people around you

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12
Q

What are the problems with the APT?

A
  1. No way to tell what the factors are
  2. Large amount of computation power is constraining
  3. No economic justification
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13
Q

What are the 3 popular measures of portfolio performance?

A
  1. Treynor Ratio (Reward - Volatility Ratio)
  2. Sharpe Ratio (Reward - Variability Ratio)
  3. Jensen’s Alpha
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14
Q

What are 3 additional measures of portfolio performance?

A
  1. Fama’s Measure of net selectivity
  2. Attribution Analysis
  3. Information Ratio
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15
Q

What is Fama’s measure of net selectivity?

A

Return Due to Net Selectivity = Return Above the Market - Return Due to Lack of Diversification

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16
Q

What is attribution analysis?

A

Performance can be attributed to an allocation effect and a selection effect

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17
Q

What is the information ratio?

A

The managers excess returns over the benchmark

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18
Q

What are the 6 characteristics of a benchmark?

A
  1. Unambiguous: Names and weights of securities are clearly delineated
  2. Investable: You can buy into the index and forgo active management
  3. Measurable Returns
  4. Appropriate for a manager’s investment style
  5. Reflective of Current Investment Opinions
  6. Specified in advance
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19
Q

What are the 4 global views of market efficiency?

A
  1. We will have a large number of profit maximizing investors analyzing securities independently of each other
  2. New information will arrive in a random fashion
  3. Security prices reflect new information rapidly
  4. Therefore, price changes will be independent and random
20
Q

What are the 3 classic types of market efficiencies and what do they entail?

A
  1. Weak Form Efficiency: Current stock prices fully reflect all the information contained in historic stock market data
  2. Semi-Strong Form Efficiency: Current stock prices fully reflect all publicly available information
  3. Strong Form Efficiency: Current stock prices fully reflect all information, publicly available and private information
21
Q

What are tests of weak form efficiency?

A
  • Tests of weak form efficiency are tests of random movement.
  • If the movement in stock prices is random or independent the market is said to be weak form efficient.
  • If the price movements are dependent on each other from trade-to-trade or day-to-day the market is not weak form efficient.
22
Q

What are the 3 types of tests for weak form efficiency?

A
  1. Test of serial or autocorrelation
  2. Runs test
  3. Filter rule
23
Q

What is a test of serial or autocorrelation test of weak form efficiency?

A
  • Measure the correlation of the returns of a security on day t, to the returns of security i on day t + 1
  • If the correlation is significantly different than zero the market is not weak form efficient
24
Q

What is a Runs test of weak form efficiency?

A
  • Looks at the sign of successive price changes of security i over time
  • If there are significant runs, the market is not weak form effiicent
25
Q

What is the filter rule test of weak form efficiency?

A
  • Buying and selling based on some % of price movement
  • If you can make a profit from the filter rule, the market is not weak form efficient
26
Q

What costs go up when the market closes?

A

Transaction costs go up, as liquidity and volume goes down

27
Q

Returns to a fund can be broken down into what 4 components?

A
  1. Asset allocation
  2. Market timing
  3. Security Selection
  4. Other
28
Q

What are 3 popular ways to approach asset allocation?

A
  1. Cash Flow Requirements Approach
  2. Historical Risk and Return Approach
  3. Asset Pricing Models
29
Q

How do you calculate the cash flow requirements approach to asset allocation? And What are the advantages and disadvantages of using it?

A
  • Initial Wealth + Cash Outflow = (Initial Wealth - X)(1+%) + X(1+%)
  • Advantage: Simple calculation
  • Disadvantage: Ignores risk
30
Q

How do you calculate the historical risk/return approach to asset allocation? And What are the advantages and disadvantages of using it?

A
  • Calculate the historical return and risk of the different asset classes and compare them
  • Advantage: Considers risk
  • Disadvantage: Does not identify optimal
31
Q

What asset pricing models could be used to for asset allocation?

A
  • APT
  • CAPM
  • MEF
32
Q

What are 2 speculative strategies associated with asset allocation?

A
  • Tactical asset allocation
  • Security selection
33
Q

What is a mortgage bond?

A

A bond secured via physical assets

34
Q

What is an equipment trust certificate?

A

A bond secured by a specific asset, such as plane or train, usually used in transportation industry

35
Q

What is a collateral trust bond?

A

A bond secured by bonds or stocks in another corporation

36
Q

What are the details of a bond listed?

A

The bond indenture

37
Q

What is a bond’s nominal yield?

A

The coupon rate

38
Q

What is a bond’s current yield?

A

Annual coupon payment and current price

39
Q

What is a bond’s promised yield or yield to maturity?

A

The amount an investor will receive if they hold the bond to maturity

40
Q

What is a bond’s yield to call?

A

The amount an investor will receive if they hold the bond to call

41
Q

What is a bond’s realized yield?

A

The amount an investor receives when the bond is sold before maturity

42
Q

What 4 theories may explain the shape of the yield curve?

A

-Expectations hypothesis
- Liquidity preference / premium theory
-Segmented markets or preferred habitat
- Eclectic theory

43
Q

What is the expectations hypothesis in regards to explaining the yield curve?

A
  • The long-term rate is a geometric mean of the current and future short-term rates.
  • Well accepted, explains any curve
44
Q

What is the liquidity preference theory in regards to explaining the yield curve?

A
  • Investors prefer short-term bonds, where the payoff of the premium is more certain. To invest in longer-term bonds, they must receive a premium
  • Well defined, additive theory
45
Q

What is the segmented markets or preferred habitat theory in regards to explaining the yield curve?

A
  • Investors have particular maturity segments in which they wish to invest. In each segment, the yield curve is determined by supply and demand.
  • Holding supply constant, as demand goes up, prices goes up, and yield goes down. As demand goes down, price goes down and yield goes up.
  • Less well accepted, can explain any curve
46
Q

What is the eclectic theory in regards to explaining the yield curve?

A
  • Investors have a predetermined long-term rate in mind, perhaps determined by experience. If the short-term rate is below that, they perceive the yield curve as ascending.
  • Less well accepted

FIN4050 - Portfolio Management Theory (8 decks)

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