Portfolio Management

Question 1

Portfolio Variance

Answer 1

Σw(x - µ)^{<span>2</span>}

Question 2

Portfolio Duration

Answer 2

Σ(w*Dur)

(Weights based on market value)

Question 3

Variance of a

2 Asset Portfolio

Answer 3

w_A²σ_A² + w_B²σ_{<span>B</span>}² + 2w_{<span>A</span>}w_{<span>B</span>}Covariance

Question 4

Covariance

Answer 4

Σ[(x_A - µ_A)*(x_B - µ_B)] / (n - 1)

or

Σ(x_A - µ_A)*(x_B - µ_B)*P(E)

or

Correlation * σ_A * σ_B

Question 5

Correlation

Answer 5

Covariance

———————

σ_A * σ_B

Measures the strength of the linear relationship between two random variables.

Question 6

Strategic Asset Allocation

Answer 6

Assets in the same asset class have high paired correlations and low correlations with assets in other asset classes.

Question 7

Portfolio Management Process

Answer 7

Execution

• Asset Allocation
• Security Analysis
• Portfolio Construction

Feedback

• Performance Measurement

Question 8

Optimal Risky Portfolio

Answer 8

The point of tangency between the Capital Allocation Line (CAL) and the Efficient Frontier of risky assets.

Question 9

Portfolio Alpha

Answer 9

r_p - ß[E(r_mkt) - r_rf] + r_rf

or

Portfolio Return - k_ce (CAPM)

Question 10

U.S. Asset Classes

from Riskiest to Least Risky

Answer 10

• Small-Cap Stocks
• Large-Cap Stocks
• Long-Term Government Bonds
• Long-Term Corporate Bonds
• T-Bills