Portfolio management Flashcards
What is portfolio perspective?
It is evaluating individual investments by their contribution to the risk and return of an investor’s portfolio
Formula of diversification portfolio
risk of equally weighted portfolio of n securities / risk of single security selected at random
What is portfolio management process?
Planning, execution step, feedback
What is endowment?
It is fund that is dedicated to provide financial support on an ongoing basis for a specific purpose
What is foundation?
It is fund that is established for charitable purpose to support spefic types of activities or to fund specific research
Formula of net asset value
net value/no of shares
What is no load fund?
There are no fees for purchasing or selling shares
What is load fund?
It charges upfront fees, redemption fees or both
What are types of mutual funds? (3)
Money market, bond and stock
How ETFs are managed?
Usually passively with prices close to NAV
What are characteristics of ability to bear risk?
Longer investment horizon, greater assets vs liabilities and more insurance and secure job
What are factors that needs to be considered as a manager?
Risk, rewards, time horizon, tax, liquidity, legal, unique
What is strategic asset allocation?
% allocations to included asset classes
What is tactical asset allocation?
It is variations from strategic asset allocation weights in order to take advantage of perceived short-term opportunities
What is security selection?
It is deviation from index weights on individual securities within an asset class
What is risk budgeting?
It is overall risk limit for the portfolio and budgets o portion of permitted risk and allocates risk to each strategy
What is core-satellite approach?
Majority is invested in passively managed index and small portion in active strategies
What are cognitive errors?
Errors due to primarily faulty reasoning or irrationality
What are emotional biases?
Biases not related to concious thoughts
What is belief perseverance biases?
Irrational reluctance to change prior to conclusions and decisions
What are processing errors?
Flaws to information analysis
What is cognitive dissonance?
It is situation where individual holds conflicting beliefs or received information that causes current belied to be questioned
What is concervatism bias?
It is rational from initial view, however fails to change view when new information becomes available
What is confirmation bias?
Seeking information that supports prior beliefs
What is representativeness bias?
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
What is base-rate neglect?
It is analyzing individual number of population without adequately considering probability of a characteristic in that population
What is sample size neglect?
Making classification on small and unrelated sample
What is illution of control bias?
It is illusion that you can control things that actually cannot be controlled
What is hindsight bias?
It is selective memory of a past resulting in tendency to see things as more predictable tha they are
What is anchoring and adjustment bias?
Basing expectations on prior number and overweighting its importance, making adjusments only when new information arrives
What is mental accounting bias?
It is viewing money in different accounts or sources differently when making investment decisions
What is framing bias?
Decisions are affected in a way the question is framed
What is availability bias?
It is putting value emphasis on information that is readily available, easy to recall or based on personal experience or knowledge
What is loss aversion bias?
It is feeling more pain from loss than pleasure from an equal gain
What is overconfidence bias?
It is marekt participants overestimate their own and intuitive ability or reasoning
What is self-control bias?
Lack of individual self discipline and favoring short term satisfication over long-term goals
What is endowment bias?
It is when asset is felt to be more special and more valuable because it is already owned
What is regret-aversion bias?
It is when market participants do nothing out of excessive fear that actions could be wrong
What is halo effect?
It is making conclusions based on certain good characteristics that a stock is good to own
What is risk management?
It is identifying risk tolerance of organization, identifying risks and their measure and monitoring of it
What is risk governance?
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
What is financial risk?
Risks arising from financial markets
What are financial risks? (3)
Credit, liquidity, market risks
What are non-financial risks?
Operations of organization and sources external to the organization
What are non-financial risks? (8)
Operational, solvency, regulatory, political, legal, model, tail, accounting
What is tail risk?
It is when external events are more likely than orhanization indicates
What is beta?
It is market risk of equity securities and portfolio of equity securities
What is delta?
It is sensitivity of derivatives value to price of underlying asset
What is gamma?
It is sensitivity of delta to changes in the price of the underlying asset
What is vaga?
It is sensitivity of derivatives value to volatility of price of the underlying asset
What is rho?
It is sensitivity of derivatives value to changes in risk-free rate
What is value at risk?
It is minimum loss over a period that will occur with a specified probability
What is conditional VAR?
It is expected valuie of a loss, given that loss exceeds a minimum amount
What is stress testing?
It is examining effects of specified change in key variable
What is scenario analysis?
It is ‘what-if’ analysis
What is self-insurance?
It is situation where organization decides to bear the risk
What is risk transfer?
It is situation when another party takes on the risk
What is fidelity bond?
It is paying for loss that result from employee theft or misconduct
What is surety bond?
It is when insurance company makes a payment if third party fails to perform
What is risk shifting?
It is way to change distribution of possible outcomes and is accomplished primary with derivative contract
What is correlation between SD and returns?
Positive
What is returns distribution and kurtosis?
Negative skew with greater kurtosis
What utility function shows?
Preferences regarding risk and return
What is indifference curve?
It is utilities function on which all points investor is indifferent about
What represents risk aversion coefficient?
How steep the indifference curve is, the steaper the more risk aversion
Formula of SD of portfolio where one asset is risk free
Wa*SDa
What is two fund combination theory?
All portfolios will be made up of some combination of risky and non-risky assets
Formula of SD of portfolio when assets are perfectly correlated
w1SD1+w2SD2
What portfolios are on the efficient frontier?
Portfolios with greatest expected return for each level of risk
What is global minimum-variance portfolio?
It is portfolio on the efficient frontier with least risk
What is capital allocation line?
It shows possible portfolio risk and return combination given risk-free rate and the risk and return of a portfolio of risky assets
Where on the graph is optimal CAL?
It is tangent to indifference curve
What is market portfolio?
All investors that hold any risky assets hold the same portfolio of risky assets under homogenous expectations
What is capital market line?
It is special case of CAL as risky portfolio that investors hold here is market portfolio
Formula of CML
E(Rp)=Rf+((E(Rm))-Rf)/sd_m)*sd_p
What is unsystematic risk?
It is risk that can be diversified
What is systematic risk?
It is risk that cannot be diversified
What risk market compensates for?
Market compensates only for systematic risk that cannot be diversified
What are multifactors models?
It is model that uses macroeconomic factors to determine returns
Formula of multifactors model
E(Ri)-Rf=sum of B_i*E_i
What is market model?
It is model that estimates beta and abnormal returns based on actual market data
Formula of market model
Ri=alpha+B*Rm+e1
What is beta?
It is sensitivity of an asset’s return to the return on the market index
Formula of beta
COVim/(sd_m)^2 or rho_im*(sd_i/sd_m)
What is systematic market line (SML)?
It combines systematic risk (Cov) and return on market
Formula of SML
E(Ri)=Rf+((E(rmrkt)-Rf))/sd_mkt^2)*cov_imkt
or
Rf+Cov/sd_mkt^2*(E(Rmkt)-Rf)
What are assumptions of CAPM (7)
Risk aversion, utility max, frictionless markets, one period horizon, homogenous expectations, dividible assets, competitive markets
What type of portfolios plot on CML?
Only efficient portfolios
What type of portfolios plot on SML?
All properly priced securities and portfolios
What is attribution analysis?
It is analysis of sources of returns differences between acrive portfolio returns and those of a passive benchmark portfolio
What is Sharpe ratio?
It is used to compare actively managed portfolio by its benchmark by adjusting for appropriate risk
Formula of Sharpe ratio
(E(Rportfolio)-Rf)/sdportfolio
What is M-squared?
It is used for portfolio returns of risky assets, expressed as %
What is M-squared alpha?
It is any extra return above market portfolio
What are Treynor and Jensen’s alpha?
They are used to measure portfolio performance based on systematic (beta ) risk
Formula of Trynor measure
(Rp-Rf)/Beta_p
Formula of Jensen’s alpha
Rp-[Rf+beta_p(Rm-Rf)]
How number of portfolio managers affects which type of risk to measure?
If there is one manager then use total risk, if multiple then systematic risk only
