Portfolio Mathematics Flashcards
How do you calculate the “Expected return on a portfolio”?
Denoted as E(RP).
Is the weighted average of the expected returns of the component securities.
What is “Covariance”?
A measure of the co-movement (linear association) between two random variables.
What is a “Joint Probability Function”?
Given two random variables that are defined on the same probability space, the joint probability distribution is the corresponding probability distribution on all possible pairs of outputs. The joint distribution can just as well be considered for any given number of random variables.
[With reference to probability and events]
What does “Independent” mean?
The property that the occurrence of one event does not affect the probability that another event occurs.
What is “Mean-Variance Analysis”?
An approach to portfolio analysis using expected means, variances, and covariances of asset returns.
What are “Safety-First Rules”?
Rules for portfolio selection that focus on the risk that portfolio value or portfolio return will fall below some minimum acceptable level over some time horizon.
What is “Shortfall Risk”?
The risk that portfolio value or portfolio return will fall below some minimum acceptable level over some time horizon.
What is “Stress Testing”?
A specific type of scenario analysis that estimates losses in rare and extremely unfavorable combinations of events and scenarios.
