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CFA Lvl 1 > Portfolio Management > Flashcards

Portfolio Management Flashcards

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CFA flashcards
1
Q

portfolio perspective (Markowitz framework)

A

evaluating how individual investments relate to the wider portfolio

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2
Q

Three steps to portfolio management process

A
  1. Planning step
  2. Execution step
  3. Feedback step
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3
Q

diversification ratio

A

s.d. portfolio returns / average s.d of returns of the individual securities in the portfolio

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4
Q

pretax nominal return

A

returns before tax

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5
Q

after-tax nominal return

A

return after tax

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6
Q

leveraged return

A

returns that are a multiple of the return of the

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7
Q

efficient frontier

A

portfolios with the greatest level of return for each level of risk

The efficient frontier outlines the set of portfolios that gives investors the highest return for a given level of risk or the lowest risk for a given level of return. Therefore, if a portfolio is not on the efficient frontier, there must be a portfolio that has lower risk for the same return. Equivalently, there must be a portfolio that produces a higher return for the same risk.

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8
Q

global minimum-variance portfolio

A

the best return profile with minimal level of risk

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9
Q

utility function

A

investor preference with regards to risk/return

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10
Q

The capital allocation line

A

a straight line from the risk-free asset through the optimal risky portfolio.

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11
Q

According to Markowitz, an investor’s optimal portfolio is determined where the

A

investor’s highest utility curve is tangent to the efficient frontier.

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12
Q

utility/indifference curve

A

a curve across all points in which the investor is indifferent (happy to invest across) - spread across different risk and returns

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13
Q

The capital market line (CML)

A

plots return against total risk, which is measured by standard deviation of returns.

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14
Q

A portfolio to the right of the market portfolio on the CML is:

A

an inefficient portfolio.

A portfolio to the right of a portfolio on the CML has more risk than the market portfolio. Investors seeking to take on more risk will borrow at the risk-free rate to purchase more of the market portfolio

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15
Q

Assumptions of CAPM:

A
  • mean-variance framework
  • unlimited lending/borrowing at Rf
  • homogenous expectations
  • one-period time horizon
  • divisible assets
  • frictionless markets
  • no inflation and interest rate changes
  • capital markets equilibrium
  • investors are price takers
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16
Q

Cognitive dissonance

A

where an individual has conflicting beliefs e.g. a new piece of evidence challenges their assumption

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17
Q

Conservatism bias

A

not changing your opinion of something when new information is released

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18
Q

Confirmation bias

A

ignoring information that disagrees with your established views

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19
Q

Representative bias

A

assuming that all members of a population/sample share the same characteristics
e.g. base-rate neglect, sample-size neglect

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20
Q

Illusion of control bias

A

thinking you can control something but you cannot

e.g. illusion of knowledge, self-attribution, overconfidence,

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21
Q

Hindsight bias (‘i knew is all along phenomenon’)

A

being selective in your memory of past events, resulting in a tendency to see events being more predictable than they really are

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22
Q

Anchoring/adjustment bias

A

a cognitive bias that causes us to rely too heavily on the first piece of information we are given about a topic.
may lead to overtrading, underestimation of risk, and lack of diversification

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23
Q

Mental accounting bias

A

viewing money in different accounts or from different sources differently when making investment decisions e.g. treating a bonus differently to your regular income

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24
Q

Framing bias

A

Occurs when decisions are affected by the way in which the question is framed

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25
Q

Availability bias

A

putting undue emphasis on on information that is readily available/easy to recall e.g. picking a manager you know

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26
Q

loss-aversion bias

A

feeling more pain from losses than joy with equal gains

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27
Q

overconfidence bias

A

overestimating own abilities to make decisions - can also lead to illusion of knowledge bias and self-attribution bias

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28
Q

self-control bias

A

occurs when individuals lack self-discipline and favour short-term sacrifices to meet long-term goals.

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29
Q

status quo bias

A

occurs when comfort with an existing situation causes a resistance to change

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30
Q

Endowment bias

A

occurs when an asset is felt to be special and more valuable because it is already owned

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31
Q

Regret-aversion bias

A

occurs when investors do not take action, due to fear of being wrong
e.g. herding behaviour

32
Q

Delta

A

sensitivity of derivative values to the price of underlying asset

33
Q

Gamma

A

sensitivity of delta to the price of the underlying asset

34
Q

Vega

A

sensitivity of derivative values to the volatility of the price of the underlying asset

35
Q

Rho

A

sensitivity of derivative values to changes in the risk-free rate

36
Q

Tail risk

A

the uncertainty about the probability of extreme (negative outcomes) e.g. downside risk, VaR

37
Q

Value-at-Risk (VaR)

A

minimum loss over period with a specific probability

e.g. 1-month VAR of $1m with 5% probability = an expected loss of at least $1m in 5% of months

38
Q

Conditional VaR

A

expected value of loss, given that loss exceeds a specific amount.
It is calculated as the probability-weighted average loss for all losses over a certain amount

39
Q

self-insurance

A

where a company bear the losses of a particular risk factor

40
Q

risk transfer

A

when another party takes on a specific risk

41
Q

surety bond

A

where an insurance company agrees to make a payment if a third-party fails to perform its duty to an organisation.

42
Q

fidelity bonds

A

where an insurance company agrees to make a payment in the event of employee theft/misconduct.

43
Q

risk shifting

A

distributing risks via the use of derivative contracts

44
Q

Risk management process / framework

A

The risk management process should identify an organization’s risk tolerance, identify the risks it faces, and monitor or address these risks. The goal is not to minimize or eliminate risks.

This includes the procedures, analytical tools, and infrastructure to conduct the risk governance process

45
Q

Risk governance should most appropriately be addressed within an organization at:

A

the enterprise level.
Risk governance should be approached from an enterprise view, with senior management determining risk tolerance and a risk management strategy on an organization-wide level

46
Q

Risk budgeting

A

Selecting assets or securities by their risk characteristics up to the maximum allowable amount of risk. The maximum amount of risk to be taken is established through risk governance.

47
Q

Sources of financial risk

A
  • market risk
  • credit risk
  • liquidity risk
48
Q

Technical analysis

A

Driven only by share price and volume of trading data to project price.
3 key principles:
1. Market prices reflect all known info
2. Market prices exhibit trends and countertrends that persist.
3. Patterns and and cycles repeat themselves in predictable ways.

49
Q

A market that is ‘uptrend’ in prices

A

demand is increasing relative to supply (prices consistently rising) (+1 gradient)

50
Q

A market that is ‘downtrend’ in prices

A

supply is increasing relative to demand (prices consistently declining) (-1 gradient)

51
Q

A market that is in ‘consolidation’

A

there is neither an uptrend or downtrend apparent.

52
Q

support level

A

Price where buying pressure limits a downtrend (the lowest/bottom price of a stock)

53
Q

resistance level

A

price where selling pressure limits and uptrend (the highest/top price of a stock)`

54
Q

‘change in polarity’

A

breached resistance levels –> support levels and breached support levels –> resistance levels

55
Q

Technical indicators

A
  • Price-based indicators e.g. moving averages, Bollinger bands
  • Momentum oscillators e.g. ROC, RSI, MACD
  • Sentiment (non-price) indicators e.g. put/call, VIX, margin debt
56
Q

momentum oscillator

A

indicators based on market prices but scaled so they ‘oscillate around a given value.

57
Q

Convergence

A

When the oscillator shows the same pattern as prices

58
Q

Divergence

A

When the oscillator shows a different pattern as prices

59
Q

Rate of Change (ROC) oscillator

A

100x the difference between the latest closing price and the closing price n periods earlier. Oscillates around 0

60
Q

Relative Strength Index (RSI)

A

based on the ratio of total price increases to total price decreases over n number of periods. The ratio is then scaled to oscillate between 0-100, with high values indicating an overbought market and visa versa.

61
Q

Moving Average Convergence/Divergence (MACD)

A

MACD oscillators are drawn using smoothed moving averages - placing greater weight on recent observations. The MACD line is the difference between two exponentially smoothed moving averages of the price.
- Used to identify convergence/divergence with the price trend.

62
Q

Stochastic oscillator

A

Calculated from the latest closing price and highest/lowest prices reached in a recent period.
- the “%K” line is the difference between the latest price and the recent low as a percentage of the difference between the recent high and low. The “%D” line is a 3-period average of the %K line.

63
Q

put / call ratio

A

put volume / call volume

p/c ↑ negative outlook for price of asset

64
Q 
Volatility Index (VIX)
(calculated by the Chicago Board Options Exchange)
A
  • measures the volatility of options on the S&P 500 stock index.
    VIX ↑ investors fear a decline in the stock market
65
Q

Margin debt

A

total margin debt ↑, aggressive buying by bullish margin investors.

66
Q

intermarket analysis

A

an analysis of the relationships between market values of major asset classes, such as stocks, bonds, commodities and currencies.

67
Q

Relative strength charts

A

used to determine which asset classes are outperforming

68
Q

the ‘Buy signal’ - when using moving average

A

‘golden cross’: a shorter-term average above a longer-term average

69
Q

the ‘Sell signal’ - when using moving average

A

‘dead cross’: a shorter-term average below a longer-term average

70
Q

‘Big Data’

A
  • all potentially useful data (traditional + alternative data).
  • volume, velocity and variety
71
Q

Data science and processing methods

A

How we extract information

  • capture
  • curation
  • storage
  • search
  • transfer
72
Q

supervised learning

A

a machine learning technique in which a machine is given labelled input and output data and then models the output data based on the input data

73
Q

unsupervised learning

A

a machine is given input data in which to identify patterns and relationships, but no output data to model

74
Q

Deep learning

A

a technique to identify patterns of increasing complexity, and may use supervised or unsupervised learning.

75
Q

Overfitting

A

A model that is overfit (too complex) will tend to identify spurious relationships in the data. Labelling of input data is related to the use of supervised or unsupervised machine learning techniques.

76
Q

Underfitting

A

Underfitting describes a machine learning model that is not complex enough to describe the data it is meant to analyse. An underfit model treats true parameters as noise and fails to identify the actual patterns and relationships.

77
Q

Tokenization

A

maintaining ownership records for physical assets on a distributed ledger.

CFA Lvl 1 (10 decks)

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