Portfolio Management Flashcards
AP
+ shares by delivering the creation basket
ETFs trades in _ market(s)
primary & secondary
Tracking Error
Annualized std of daily tracking diff.
ETF Premium/discount
(ETF Price -NAV)/NAV
Risk of investing in ETF
- Counterparty risk
- fund closures
- expectation-related risk
APT
describes equilibrium relationship b/w EXPECTED returns for well-diversified portfolios and their multiple sources of systematic risk
APT assumptions
- unsystematic risk can be diversified away
- returns are generated in a factor model.
- no arbitrage opp. exist
APT is based in part on the assumption that as assets are added to a portfolio, the portfolio becomes well diversified and asset-specific risk is eliminated. Therefore, adding assets to a diversified portfolio should decrease its specific risk.
expected return formula
rf + factor sensitivity * factor risk
Macroeconomic factor model
assume asset returns are explained by SURPRISES in macroeconomic risk factors
Fundamental factor model
assume asset returns are explained by returns from multiple firm-specific factors
statistical factor model
use multivariate statistics to identify statistical factors that explain the COVARIATION among asset returns, weakness: no economic interpretation
active risk squared
active factor risk (factor tilt/weight) + active specific (asset selection)
Information ratio
Active return/active risk;
altered by the addition of cash or use of leverage;
for an UNCONSTRAINED portfolio, the information ratio is unaffected by the aggressiveness of active weights
multifactor models
good for active and passive
factor model
factor sensitivity of 1 to 1 factor and 0 to all other, used for speculation or hedging
VAR
- minimum loss
- given prob
- specific period
var model - parametric
use est. var and cov of securities to est the distribution of possible values, assuming normal distribution
var model - historical
use historical over prior LOOKBACK period
var model - monte carlo simulation
draws each risk factor change from an assumed distribution and calculates portfolio values based on a set of changes in risk facts, repeated 1000 times
Adv of VAR
- widely accepted
- simply to understand
- expresses risk as a single number
- useful for comparing the risk of portfolios, portfolio components, and business units
disadv of VAR
- Subjective to time and probability by choice
- sensitive to est. and assumption
- focuses only on left-tail outcome
- vulnerable to misspecification by user
conditional var
expected loss given that the loss exceeds VaR
INCREMENTAL VAR
est change in var from a specific change in the size
marginal var
est of the change in var for a small change in position, use as an est of contribution to overall var
risk measure by bank
asset-liability, market, leverage, duration, convexity, overall risk to economic capital
risk measure by asset manager
return vol, prob distribution of absolute losses or losses relative to benchmark
risk measure by pension fund manager
mismatch b/w A/L, volatility of the surplus
risk to p&c
sensitivity of investment portfolios to risk factors, var, scenarios incorporate market and insurance risks as stress tests
risk to life insurers
market risk, mismatch b/w a/l
Short-term interest rates
positively related to GDP growth and expected volatility in GDP growth;
In recession, short-term policy rates tend to be low. Positive slope of yld curve.
BEI
expected inflation and risk premium for uncertainty in inflation;
yld on no-inflation-index - yld on inflation-indexed bonds
Credit spreads
widen during economic downturns, narrow during expansion.
Credit spread = Yield - BEI - R
Sharpe Ratio
(Rp-Rf)/ vol(p)
Unconstrained portfolio optimial active risk*
IR/SRb*VOL(b)
optimal weighht = optimal active risk*/active risk
