Marketing Portfolio Flashcards
According to Modern Portfolio Theory, the risk of a portfolio is
The standard deviation of the portfolio returns.
According to Modern Portfolio Theory, the risk of a single asset is
The additional risk it adds to the portfolio.
Criticisms of Modern Portfolio Theory
1) Markets are not necessarily efficient
2) Risk is not measured correctly
3) Overly technical
4) Beta explains little of expected stock returns
Fat tails
Probability distributions with more probabilities in the “tails” than predicted by the normal distribution. A higher probability of getting an especially good or bad result.
Risk
Variation where we mostly know how often outcomes will occur.
Uncertainty
Variation where we don’t know how often outcomes will occur.
Black Swan Risk
The chance of something occurring that we didn’t include in our possible events.
Risk that can’t be diversified away
Non-diversifiable risk
Market risk
Systematic risk
Risk that can be diversified away
Diversifiable risk
Business-specific risk
Non-systematic risk
Expected Market Risk Premium
E(Rm) - Rf
Multi-Factor Model
A model that attributes expected stock returns to multiple causes.
Capital Asset Pricing Model (Equation)
Expected stock return is a function of market risk. Assumes that the investor holds a well-diversified portfolio.
Beta
A measure of market risk
CAPM Equation
E(Ri) = Rf+Bi(E(Rm)-Rf)
Sharpe Ratio
Evaluates portfolio performance using standard deviation (SD) as a measure of risk.
=(E(Ri)-Rf)/SD
