Portfolio Mgmt Flashcards
Assumptions of APT
1) Unsystematic risk can be diversified away in a portfolio
2) Returns are generated using a factor model
3) No arbitrage opportunities exist
Active Return
RP - RB
Active Risk
The standard deviation of active return over time
Active Risk Squared
Active Factor Risk + Active Specific Risk
Information Ratio (IR)
Active Return / Active Risk
RP - RB) / s(RP - RB
Value Added by Active Management
Active Portfolio Return - Benchmark Return
Sum(change in wi * return of security i)
Unconstrained portfolio optimal active risk
(IR / SRb) * øb
Fundamental Law of Active Portfolio Mgmt
IR = (TC) * IC * sqrt(BR)
An investor will always choose an active manager with the highest _______ regardless of her risk aversion
Information Ratio
Break Even Inflation Rate (BEI)
Yield on non-inflation indexed bonds - yield on inflation-indexed bonds
Determinants of client’s ability to tolerate risk
Size of portfolio, time horizon, spending and liquidity needs
NOT the clients perception of ability to tolerate risk
Credit spreads _____ in economic downturns and _____ in expansions
Expand / Shrink
When credit spreads narrow, lower-rated bond (out/under) perform higher-rated bonds?
Out-perform
