Portfolio Concepts Flashcards
Mean-Variance Portfolio Theory
Based on the idea that the value of investment opportunities can be meaningfully measured in terms of mean return and variance of return.
Minimum-Variance Portfolios
Portfolios that have minimum variance for each given level of expected return.
Capital Allocation Line (CAL)
Describes the combinations of expected return and standard deviation of return available to an investor from combining her optimal portfolio of risky assets with the risk-free rate.
Capital Market Line (CML)
When investors share identical expectations about mean returns, variance of returns, and correlations of risky assets, the CAL for all investors is the same, it is known as the CML.
Security Market Line (SML)
The graph of the CAPM is the SML.
Priced Risk
Risk for which investors require an additional return for bearing.
Tracking Risk
The standard deviation of the differences between a portfolio’s and the benchmark’s total return.
Value at Risk
A probability based measure of the loss that one anticipates will be exceeded only a specified small fraction of the time over a given horizon.
Information Ratio
A measure of active return per unit of active risk.
Arbitrage Portfolio
A portfolio with factor sensitivities of zero to all factors, positive expected net cash flow, and an initial investment of zero.
Factor Portfolio
A portfolio with a factor sensitivity of one to a particular factor and zero to all other factors.
Tracking Portfolio
A portfolio with a specific set of factor sensitivities designed to replicate the factor exposures of a benchmark index.
