Investment risk Flashcards
What is the difference between correlation and beta
Correlation is if they are related and beta measures the magnitude of their moves relative to one another
Correlation measures range from what to what
It ranges from -1 to 1, where:
1 indicates a perfect positive linear relationship,
-1 indicates a perfect negative linear relationship, and
0 indicates no linear relationship.
how is beta calculated
Beta is calculated by regressing the returns of a security or portfolio against the returns of a market index (e.g., S&P 500). The slope of this regression line represents the beta.
What is VaR
The maximum loss the portfolio might experience within a specific time frame and confidence level.
What is Sharpe Ratio
The return of a portfolio versus the risk free rate. Sharpe Ratio measures the risk-adjusted return of an investment or portfolio by comparing the excess return (return above the risk-free rate) to the volatility of returns.
what is the difference between sharpe ratio and information ratio
Sharpe is vs risk free return and information ratio is vs a benchmark
What is the definition of Volatility
The extent to which the returns of the portfolio deviate from the average return.
How do you calculate volatility
Calculate the standard deviation of the portfolio’s historical returns to assess its volatility.
How do you measure downside capture in a portfolio of stocks
Step 1: Calculate the excess return of the portfolio and the benchmark during periods of negative benchmark returns (downside).
Step 2: Divide the portfolio’s excess return by the benchmark’s excess return during these periods.
Step 3: Multiply the result by 100 to express the downside capture as a percentage.
How do you interpret downside capture in a portfolio of stocks
A downside capture of less than 100% indicates that the portfolio tends to lose less than the benchmark during downturns, which is generally desirable for risk management. Conversely, a downside capture greater than 100% means the portfolio loses more than the benchmark during downturns.
what is the difference between correlation and covariance
Covariance measures how two variables change together, while correlation measures how closely two variables are related
What is a good sharpe ratio
A Sharpe ratio greater than 1 is considered acceptable, while ratios above 2 are often seen as very good.
What is a good value for an information ratio
greater than 0 is considered favorable, as it indicates that the portfolio is outperforming the benchmark on a risk-adjusted basis. Ratios above 0.5 or 1 are often considered strong
What is a p-value
indicates the significance of the observed differences
What is a signifcatn P-value
If the p-value is less than the chosen significance level (α), typically 0.05, it is considered statistically significant.
This suggests that the observed result is unlikely to have occurred by chance alone if the null hypothesis is true. In this case, the null hypothesis is often rejected in favor of an alternative hypothesis.
If the p-value is greater than the chosen significance level, it is not statistically significant.
This means that the observed result is likely to have occurred by chance, and there is insufficient evidence to reject the null hypothesis.
What is DV01
It represents the dollar change in the bond’s price for a one-basis-point change in yield
define Modified Duration
Modified duration is a measure of the percentage change in the price of a bond for a one percentage point change in yield. It is derived from Macaulay duration
what is Macaulay duration
Measured in years. It is a weighted average of the times until each payment (coupon and principal) is received, with the weights proportional to the present value of the payments. It provides a measure of the bond’s effective maturity or the bond’s sensitivity to changes in interest
What is a yield curve
A chart the yield of bonds with similar credit quality but differing maturities
Name 3 popular risk systems
Blackrock Alladdin
MSCI Barra
Bloomberg Port
What do beta values indicate
Beta = 1: Indicates that the stock’s price moves exactly in line with the market.
Beta > 1: The stock is more volatile than the market. For example, a beta of 1.5 suggests that the stock is 50% more volatile than the market.
Beta < 1: The stock is less volatile than the market. A beta of 0.5 means the stock is 50% less volatile.
Beta = 0: Implies no correlation with the market movements.
Negative Beta: It’s possible but rare, indicating an inverse relationship to the market.
Most stocks have betas between 0 and 31.
What are the 4 measures of the Karnosky Singer attribution method
Currency - This measures the impact of the investor’s decisions to allocate assets across different currencies. It quantifies how much of the portfolio’s return can be attributed to currency selection and exchange rate movements.
Market Allocation - The contribution of the investor’s allocation decisions across various markets or countries. It isolates the impact of choosing specific geographic markets or sectors on the overall portfolio performance.
Security Selection -
Interaction Effect: - combined effect of market allocation and security selection
Contrast Brinson-Fachler to Karnosky Singer
Currency is the main difference.
Karnosky-Singer: Explicitly accounts for the impact of currency allocation and exchange rate movements.
Brinson-Fachler: Assumes a single currency environment and does not account for currency effects.
Is how is the systematic return of a stock calculated
Beta × market return
How is the return of a stock calculated
Return equals beta times market plus alpha or intercept + noise or idiosyncratic return
Estimating alpha is the job of who
The fundamental investor
Estimating alpha is the job of who
The fundamental investor
Estimating beta and identifying correct benchmarks is the job of
The quantitative risk manager
Name three sources of market sentiment and analysis
The conference boards consumer confidence index
The university of michigan’s survey of consumers
The purchasing managers index
