IP - Chapter 13 - Investment Company Analysis* Flashcards
What are the 6 steps in the investment process?
1) Collect relevant information
2) Identify constraints
3) Compute Risk/Return Objectives
4) Identify Funds (to be included in the portfolio)
5) Identify Appropriate Allocation (per fund)
6) Monitor Portfolio
Highest level of return for each level of risk
Mean Variance Optimization
What 3 things does mean variance optimization measure?
Allocation, Expected Return, and Variability
These help to determine how diversified that the portfolio is?
Correlation Coefficients
What does a prospectus typically include?
- Investment Objectives/Goals
- Strategies for reaching goals
- Risks
- Fees/Expenses
- Past performance
When an investment manager changes to investing outside of the stated fund objective
Style Drift
What is geometric return also known as
IRR
Mutual funds make the most sense to hold in ____________ accounts.
Qualified (tax deferred accounts)
High portfolio turnover and tax is only good for investors if …
1) Securities purchased outperform the ones that were sold
2) If the realized gain surpasses the marginal tax rate of the investor
Many mutual funds wave the minimum investment requirement if…
Buyer agrees to make regularly scheduled payments
Includes more detailed disclosures about the fund and the investor must request it or search the EDGAR database
(SAI) Statement of Additional Information
What is the Coefficient of Correlation?
- R
- Ranges from -1 to +1
- Measures correlation between funds
What is the coefficient of determination? What does it measure?
- R2
- Correlation to the index (identifies how much unsystematic risk the holding is subject to)
What does a fund with a lower r2 bring to a portfolio?
More diversification
How much systematic/unsystematic risk is a mutual fund with an r2 of .70 subject to?
70% systematic risk
30% unsystematic risk
How is beta calculated?
Covariance of a fund & index / Variance of the index
A measure of how much two assets move together
Co-variance
What does a beta greater that 1 mean?
More systematic risk than benchmark
What does a beta less than 1 mean?
Less systematic risk than benchmark
3 measures of risk adjusted return by modern portfolio theory?
1) Jensen’s Alpha
2) Sharpe Ratio
3) Treynor Ratio
What is the CAPM formula?
Rf + Beta(Rm - Rf)
Jensens alpha formula?
Difference between actual return of the fund and CAPM:
[Rp - (Rf + Beta(Rm - Rf)]
This is used to determine the performance of fund managers
Jensen’s Alpha
What does a + alpha mean?
Manager’s fund has better than expected performance
What does a - alpha mean?
Manager’s fund has worse than expected performance
What does a 0 alpha mean?
Manager’s fund has on par performance
Alpha relies on ________ as a measure of systematic risk.
Beta
Beta’s that have low _____ may not be very reliable.
R2
This ratio is used to compare other funds to determine the reward of variability or best performance as measured by standard deviation
Sharpe Ratio
Sharpe Ratio formula
(Rp-Rf)/Standard Deviation
What does R2 of 100 indicate?
That the fund is an index fund
When comparing a fund using Alpha, beta must be ___________ to give an accurate comparison to benchmark.
close to 1
Rp-Rf/Beta
Treynor Ratio
Before computing Treynor ratio, one should carefully consider variables ______ & ________ .
Beta and R2
Ratios that measure relative performance?
Treynor Ratio and Sharpe Ratio
Ratios that measure absolute performance?
Jensen’s Alpha
This accounts for the majority of variability in a portfolio?
Asset Allocation
Correlation ranges from ___________ .
-1 to +1
R2 ranges from ________ .
0 to +1
Provides insight into the % change by a mutual fund that can be explained by changes in the market
R2
This variable provides insight into whether Beta is reliable or not?
R2
Shows whether a stock can be used as a measure against a benchmark
Beta
Is a measure of a mutual funds systematic risk relative to the market?
Beta
Is an absolute measure of performance that equals the difference between the actual return for a mutual fund and the expected return based on CAPM.
Alpha
