Portfolio Management Flashcards
CAPM
rf + B[E(rm) - rf] (risk free rate + beta times market rate - risk free rate)
Price-weighted index
Holds one share of each stock and is based on their average price. (eg. 90 + 50 + 100 = 80)
Value-weighted index
Based on market value of equity. (A = 500 mil equity, B = 100 mil equity, so A has 5x weight)
Sharpe Ratio Definition
Divides average portfolio excess return over the sample period by the standard deviation of returns over that period. Looks at total risk.
Sharpe Ratio Formula
(Rp - Rf) / SD of portfolio
Treynor Measure Definition
Is a ratio of excess return to beta, like the Sharpe ratio, but it uses systematic risk (beta) instead of total risk (standard deviation).
Treynor Measure Formula
(Rp - Rf) / Beta
Beta is weighted average Beta for portfolio
Jensen’s Measure Formula
Alpha = Rp - [Rrf + (Rmktp - Rrf)(Beta)]
IRR definition
Dollar weighted return, calculated when NPV = 0
Jensen’s Alpha Definition
The average return on the portfolio over and above that predicted by the CAPM, given the portfolio’s beta and the average market return.
Beta definition
Measures the contribution of a stock to the variance of the market portfolio as a fraction of the total variance. Betas above 1 are aggressive, below 1 defensive. Market is 1.
Current Yield Bonds
Annual coupon payment divided by current price: PMT/Price.
Yield to Maturity
Solve for I/Y. Also called bond equivalent yield or annual percentage rate.
Effective Annual Yield
EAY = (1 + (interest rate / compounds per year))^compounds per year] - 1
Effective Annual Yield Example. 8.53%. Semiannual coupons.
EAY = [(1 + (8.53/2))^2] - 1
