Investments Flashcards
Investment policy statement
Written document that provides general guidelines for the investment manager. Consists of objectives, does not identify specific investments
Return measures
Holding Period Return
Arithmetic mean
geometric mean
weighted average
real rate
tax Adjusted
Use Securities cash flows in Calculation
IRR, yield to maturity, yield to call, time weighted return
Use the investors Cashflows
Dollar weighted return and all geometric mean calculations
Required Return
Use CAPM to the turn on the requirement of return on investment given a systematic risk
Expected Return Calculation
Use current price and expected future cashflows to calculate
Actual Return
Use the Sharpe, Treynor, and Jensen to determine risk adjustment performacne
List adjusted measures of performance
Sharpe
Treynor
Jensen Alpha
Information Ratio
Market Ratio
P/E Ratio
Earnings per share (EPS)
P/CF Ratio
P/S Ratio
PEG Ratio
Modern Portfolio Theory
Markowitz and modern portfolio theory
CML
CAPM/SML
The Four “Cs”
CML
Shows the risk and return trade off between a risk free asset and a well diversified risky portfolio
CAPM/SML
CAPM - determines required rate of return on assets systematic (Beta)
SML (security market line) - Graphical depiction of CAPM. slope of SML is the market risk premium. Slope becomes steeper if investors become more risk adverse when market interest rates change.
The four “Cs”
Coefficient of variation, correlation, covariance, coefficient of determination
Duration (Macaulay)
Time Weighted Payback: The weighted average maturity of a bond’s cashflows. The greater the duration, the more sensitive a bond’s price to interest rate changes.
Three variables determine a bond’s duration: coupon rate YTM, time to maturity
Modified Duration
What equals the value of Macaulay duration divided by 1+ the yield to maturity of the bond.
That gives us a linear approximation of the change in bond value that will result due to changes in yield.
