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CFA level I > Portfolio management > Flashcards

Portfolio management Flashcards

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CFA flashcards
1
Q

What is portfolio perspective?

A

It is evaluating individual investments by their contribution to the risk and return of an investor’s portfolio

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2
Q

Formula of diversification portfolio

A

risk of equally weighted portfolio of n securities / risk of single security selected at random

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3
Q

What is portfolio management process?

A

Planning, execution step, feedback

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4
Q

What is endowment?

A

It is fund that is dedicated to provide financial support on an ongoing basis for a specific purpose

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5
Q

What is foundation?

A

It is fund that is established for charitable purpose to support spefic types of activities or to fund specific research

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6
Q

Formula of net asset value

A

net value/no of shares

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7
Q

What is no load fund?

A

There are no fees for purchasing or selling shares

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8
Q

What is load fund?

A

It charges upfront fees, redemption fees or both

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9
Q

What are types of mutual funds? (3)

A

Money market, bond and stock

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10
Q

How ETFs are managed?

A

Usually passively with prices close to NAV

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11
Q

What are characteristics of ability to bear risk?

A

Longer investment horizon, greater assets vs liabilities and more insurance and secure job

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12
Q

What are factors that needs to be considered as a manager?

A

Risk, rewards, time horizon, tax, liquidity, legal, unique

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13
Q

What is strategic asset allocation?

A

% allocations to included asset classes

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14
Q

What is tactical asset allocation?

A

It is variations from strategic asset allocation weights in order to take advantage of perceived short-term opportunities

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15
Q

What is security selection?

A

It is deviation from index weights on individual securities within an asset class

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16
Q

What is risk budgeting?

A

It is overall risk limit for the portfolio and budgets o portion of permitted risk and allocates risk to each strategy

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17
Q

What is core-satellite approach?

A

Majority is invested in passively managed index and small portion in active strategies

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18
Q

What are cognitive errors?

A

Errors due to primarily faulty reasoning or irrationality

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19
Q

What are emotional biases?

A

Biases not related to concious thoughts

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20
Q

What is belief perseverance biases?

A

Irrational reluctance to change prior to conclusions and decisions

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21
Q

What are processing errors?

A

Flaws to information analysis

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22
Q

What is cognitive dissonance?

A

It is situation where individual holds conflicting beliefs or received information that causes current belied to be questioned

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23
Q

What is concervatism bias?

A

It is rational from initial view, however fails to change view when new information becomes available

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24
Q

What is confirmation bias?

A

Seeking information that supports prior beliefs

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25
Q

What is representativeness bias?

A

It is when certain characteristics are used to put an investment in a category and individual concludes that it will have the characteristics of the investment in that category

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26
Q

What is base-rate neglect?

A

It is analyzing individual number of population without adequately considering probability of a characteristic in that population

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27
Q

What is sample size neglect?

A

Making classification on small and unrelated sample

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28
Q

What is illution of control bias?

A

It is illusion that you can control things that actually cannot be controlled

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29
Q

What is hindsight bias?

A

It is selective memory of a past resulting in tendency to see things as more predictable tha they are

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30
Q

What is anchoring and adjustment bias?

A

Basing expectations on prior number and overweighting its importance, making adjusments only when new information arrives

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31
Q

What is mental accounting bias?

A

It is viewing money in different accounts or sources differently when making investment decisions

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32
Q

What is framing bias?

A

Decisions are affected in a way the question is framed

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33
Q

What is availability bias?

A

It is putting value emphasis on information that is readily available, easy to recall or based on personal experience or knowledge

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34
Q

What is loss aversion bias?

A

It is feeling more pain from loss than pleasure from an equal gain

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35
Q

What is overconfidence bias?

A

It is marekt participants overestimate their own and intuitive ability or reasoning

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36
Q

What is self-control bias?

A

Lack of individual self discipline and favoring short term satisfication over long-term goals

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37
Q

What is endowment bias?

A

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

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38
Q

What is regret-aversion bias?

A

It is when market participants do nothing out of excessive fear that actions could be wrong

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39
Q

What is halo effect?

A

It is making conclusions based on certain good characteristics that a stock is good to own

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40
Q

What is risk management?

A

It is identifying risk tolerance of organization, identifying risks and their measure and monitoring of it

41
Q

What is risk governance?

A

It is senior managements determination of the risk tolerance of the organization, elements of optional risk exposure strategy and framework for oversight of risk management function

42
Q

What is financial risk?

A

Risks arising from financial markets

43
Q

What are financial risks? (3)

A

Credit, liquidity, market risks

44
Q

What are non-financial risks?

A

Operations of organization and sources external to the organization

45
Q

What are non-financial risks? (8)

A

Operational, solvency, regulatory, political, legal, model, tail, accounting

46
Q

What is tail risk?

A

It is when external events are more likely than orhanization indicates

47
Q

What is beta?

A

It is market risk of equity securities and portfolio of equity securities

48
Q

What is delta?

A

It is sensitivity of derivatives value to price of underlying asset

49
Q

What is gamma?

A

It is sensitivity of delta to changes in the price of the underlying asset

50
Q

What is vaga?

A

It is sensitivity of derivatives value to volatility of price of the underlying asset

51
Q

What is rho?

A

It is sensitivity of derivatives value to changes in risk-free rate

52
Q

What is value at risk?

A

It is minimum loss over a period that will occur with a specified probability

53
Q

What is conditional VAR?

A

It is expected valuie of a loss, given that loss exceeds a minimum amount

54
Q

What is stress testing?

A

It is examining effects of specified change in key variable

55
Q

What is scenario analysis?

A

It is ‘what-if’ analysis

56
Q

What is self-insurance?

A

It is situation where organization decides to bear the risk

57
Q

What is risk transfer?

A

It is situation when another party takes on the risk

58
Q

What is fidelity bond?

A

It is paying for loss that result from employee theft or misconduct

59
Q

What is surety bond?

A

It is when insurance company makes a payment if third party fails to perform

60
Q

What is risk shifting?

A

It is way to change distribution of possible outcomes and is accomplished primary with derivative contract

61
Q

What is correlation between SD and returns?

A

Positive

62
Q

What is returns distribution and kurtosis?

A

Negative skew with greater kurtosis

63
Q

What utility function shows?

A

Preferences regarding risk and return

64
Q

What is indifference curve?

A

It is utilities function on which all points investor is indifferent about

65
Q

What represents risk aversion coefficient?

A

How steep the indifference curve is, the steaper the more risk aversion

66
Q

Formula of SD of portfolio where one asset is risk free

A

Wa*SDa

67
Q

What is two fund combination theory?

A

All portfolios will be made up of some combination of risky and non-risky assets

68
Q

Formula of SD of portfolio when assets are perfectly correlated

A

w1SD1+w2SD2

69
Q

What portfolios are on the efficient frontier?

A

Portfolios with greatest expected return for each level of risk

70
Q

What is global minimum-variance portfolio?

A

It is portfolio on the efficient frontier with least risk

71
Q

What is capital allocation line?

A

It shows possible portfolio risk and return combination given risk-free rate and the risk and return of a portfolio of risky assets

72
Q

Where on the graph is optimal CAL?

A

It is tangent to indifference curve

73
Q

What is market portfolio?

A

All investors that hold any risky assets hold the same portfolio of risky assets under homogenous expectations

74
Q

What is capital market line?

A

It is special case of CAL as risky portfolio that investors hold here is market portfolio

75
Q

Formula of CML

A

E(Rp)=Rf+((E(Rm))-Rf)/sd_m)*sd_p

76
Q

What is unsystematic risk?

A

It is risk that can be diversified

77
Q

What is systematic risk?

A

It is risk that cannot be diversified

78
Q

What risk market compensates for?

A

Market compensates only for systematic risk that cannot be diversified

79
Q

What are multifactors models?

A

It is model that uses macroeconomic factors to determine returns

80
Q

Formula of multifactors model

A

E(Ri)-Rf=sum of B_i*E_i

81
Q

What is market model?

A

It is model that estimates beta and abnormal returns based on actual market data

82
Q

Formula of market model

A

Ri=alpha+B*Rm+e1

83
Q

What is beta?

A

It is sensitivity of an asset’s return to the return on the market index

84
Q

Formula of beta

A

COVim/(sd_m)^2 or rho_im*(sd_i/sd_m)

85
Q

What is systematic market line (SML)?

A

It combines systematic risk (Cov) and return on market

86
Q

Formula of SML

A

E(Ri)=Rf+((E(rmrkt)-Rf))/sd_mkt^2)*cov_imkt

or

Rf+Cov/sd_mkt^2*(E(Rmkt)-Rf)

87
Q

What are assumptions of CAPM (7)

A

Risk aversion, utility max, frictionless markets, one period horizon, homogenous expectations, dividible assets, competitive markets

88
Q

What type of portfolios plot on CML?

A

Only efficient portfolios

89
Q

What type of portfolios plot on SML?

A

All properly priced securities and portfolios

90
Q

What is attribution analysis?

A

It is analysis of sources of returns differences between acrive portfolio returns and those of a passive benchmark portfolio

91
Q

What is Sharpe ratio?

A

It is used to compare actively managed portfolio by its benchmark by adjusting for appropriate risk

92
Q

Formula of Sharpe ratio

A

(E(Rportfolio)-Rf)/sdportfolio

93
Q

What is M-squared?

A

It is used for portfolio returns of risky assets, expressed as %

94
Q

What is M-squared alpha?

A

It is any extra return above market portfolio

95
Q

What are Treynor and Jensen’s alpha?

A

They are used to measure portfolio performance based on systematic (beta ) risk

96
Q

Formula of Trynor measure

A

(Rp-Rf)/Beta_p

97
Q

Formula of Jensen’s alpha

A

Rp-[Rf+beta_p(Rm-Rf)]

98
Q

How number of portfolio managers affects which type of risk to measure?

A

If there is one manager then use total risk, if multiple then systematic risk only

CFA level I (12 decks)

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