Portfolio Management: Portfolio Risk & Return Flashcards
Capital allocation line
CAL) A graph line that describes the combinations of expected return and standard deviation of return available to an investor from combining the optimal portfolio of risky assets with the risk-free asset.
Correlation coefficient
A number between −1 and +1 that measures the consistency or tendency for two investments to act in a similar way. It is used to determine the effect on portfolio risk when two assets are combined.
Covariance
A measure of the co-movement (linear association) between two random variables.
Efficient market
A market in which asset prices reflect new information quickly and rationally.
Global minimum-variance portfolio
The portfolio on the minimum-variance frontier with the smallest variance of return.
Holding period return
The return that an investor earns during a specified holding period; a synonym for total return.
Indifference curve
A curve representing all the combinations of two goods or attributes such that the consumer is entirely indifferent among them.
Internal rate of return
(IRR) The discount rate that makes net present value equal 0; the discount rate that makes the present value of an investment’s costs (outflows) equal to the present value of the investment’s benefits (inflows).
Kurtosis
The statistical measure that indicates the combined weight of the tails of a distribution relative to the rest of the distribution.
Leverage
In the context of corporate finance, leverage refers to the use of fixed costs within a company’s cost structure. Fixed costs that are operating costs (such as depreciation or rent) create operating leverage. Fixed costs that are financial costs (such as interest expense) create financial leverage.
Liquidity
The ability to purchase or sell an asset quickly and easily at a price close to fair market value. The ability to meet short-term obligations using assets that are the most readily converted into cash.
Markowitz efficient frontier
The graph of the set of portfolios offering the maximum expected return for their level of risk (standard deviation of return).
Minimum-variance portfolio
The portfolio with the minimum variance for each given level of expected return.
Money-weighted return
The internal rate of return on a portfolio, taking account of all cash flows.
Normal distribution
A continuous, symmetric probability distribution that is completely described by its mean and its variance.
Risk averse
The assumption that an investor will choose the least risky alternative.
Risk aversion
The degree of an investor’s inability and unwillingness to take risk.
Risk premium
An extra return expected by investors for bearing some specified risk.
Risk Tolerance
The amount of risk an investor is willing and able to bear to achieve an investment goal.
Skewness
A quantitative measure of skew (lack of symmetry); a synonym of skew.
Time-weighted rate of return
The compound rate of growth of one unit of currency invested in a portfolio during a stated measurement period; a measure of investment performance that is not sensitive to the timing and amount of withdrawals or additions to the portfolio.
Two-fund separation theorem
The theory that all investors regardless of taste, risk preferences, and initial wealth will hold a combination of two portfolios or funds: a risk-free asset and an optimal portfolio of risky assets.
Beta
A measure of the sensitivity of a given investment or portfolio to movements in the overall market.
Capital asset pricing model
(CAPM) An equation describing the expected return on any asset (or portfolio) as a linear function of its beta relative to the market portfolio.
