Portfolio Management Flashcards
Rate of return (or sometimes just return) of an asset equation
(A(1) - A(0))/ A(0)
A(t) asset price at time t
Change for value of portfolio to get the return of the portfolio
How to find value of portfolio
Multiple number of suits of each asset (vector containing quantities nips the portfolio) by the value of the asset
How to calculate the weights of each asset
Weights are the proportion of the investors wealth that are invested in the given asset
(Units of the asset x value of the asset)/ value of whole portfolio
What is short selling a stock
Short selling of a stock amounts to borrowing the stock, selling it and using the cash for another asset.
Expected return equation
(E(A(1))- A(0))/ A(0)
What is a convenient measure of the risk of an investment
The standard deviation of the return
Found by finding the standard deviation of the values for portfolio return for each possible scenario
What’s a convenient way of calculating variance (not db way)
Varianceis the average of squared differences from the mean
Ŵhat goes on each axis of mean-variance diagram.
X axis: variance (risk)
Y axis: mean (return)
What does a negative unit number represent
Shorting the asset
What denotes an efficient portfolio
Asset combinations that form a portfolio that has a mean at or above that of the minimum variance point portfolio (MVP Portfolio)
On the mean variance graph these portfolios form the efficient frontier on the curve.
A portfolio v is an efficient one if there is no other portfolio which has a strictly higher return than v and a strictly lower variance than v.
What is the covariance between two assets when one of them is risk less
Zero, as the variance of a riskless asset is 0
What does the mean-variance graph of a portfolio with one d one risk-less asset look like
A straight line intercepting the y axis at the rate of return of the risk less asset, and varying linearly with alpha, the proportion of the risk less asset.
The fact that this line has a point that lies on the efficient frontier proves the one-fund theorem.
The theorem states that there is a single fund P of risky assets such that any efficient portfolio can be constructed as a combination of the fund P and the risk-free asset.
What is the optimal portfolio due to the one-fund theorem
The market portfolio
In the world of shares, the market portfolio contains shares of every stock in proportion to that stock’s representation in the entire market. The weight of an asset is equal to the proportion of that asset’s total capital value to the total market capital value and it is termed capitalisation weight.
