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portfolio theory Flashcards

1
Q

what is standard deviation?

A

a measure of risk and variability of returns

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2
Q

the higher the standard deviation, the higher…..

A

the riskiness of the investments

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3
Q

what percent under the curve is +/- 1 standard deviations?

A

68%

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4
Q

what percent under the curve is +/- 2 standard deviations?

A

95%

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5
Q

what percent under the curve is +/- 3 standard deviations?

A

98%

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6
Q

what is the coefficient of variation?

A

it tells us the probability of actually experiencing a return close tot he average return

is useful in determining which investment has more relative risk when investments have different average returns

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7
Q

the higher the coefficient of variation is, the more….

A

risky an investment per unit of return is

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8
Q

what is the equation for the coefficient of variation?

A

CV = SD/average return

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9
Q

a normal distribution is appropriate when….

A

if an investor is considering a range of investment returns

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10
Q

a lognormal distributions is appropriate when…

A

if an investor is considering a dollar amount of portfolio value at a point in time

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11
Q

a lognormal distributions is appropriate when…

A

if an investor is considering a dollar amount of portfolio value at a point in time

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12
Q

what is skewness?

A

refers to a normal distribution curve shifted to the left or right of the mean return

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13
Q

positive skewness is where the curve is on the ….

A

LEFT

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14
Q

negative skewness is where the curve is on the ….

A

right

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15
Q

what is kurtosis?

A

refers to a variation of returns

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16
Q

what is leptokurtic?

A

when there is little variation of returns and the distribution has a high peak

aka treasuries

aka positive kurtosis

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17
Q

what is platykurtic?

A

when the returns are widely dispersed so the curve is low

aka negative kurtosis

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18
Q

what is covariance?

A

measure of relative risk

the measure of two securities combined and their interactive risk aka how price movements between two securities are related to each other

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19
Q

a correlation of +1 denotes that two assets are…

A

perfectly positively correlated

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20
Q

a correlation of 0 denotes that two assets are…

A

completely uncorrelated

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21
Q

a correlation of -1 denotes that the two assets are…

A

perfectly negatively correlated

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22
Q

diversification benefits begin anytime the correlation is …

A

less than 1

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23
Q

what is the beta coefficent?

A

a measure of an individual security’s volatility relative to that of the market

used to measure the volatility of a DIVERSIFIED portfolio

24
Q

the beta of the market is …

25
a stock with a beta of 1 means....
the stock will be expected to mirror the market in terms of direction, return and flucuation
26
a stock with a beta of more than 1 means...
the stock fluctuates more than the market and greater risk is associated with that particular security
27
a stock with a betta of less than 1 means....
the securities fluctuates less relative to market movements
28
beta is a measure of ....... risk while standard deviation is a measure of ....... risk
beta = market risk standard deviation = total risk
29
what is r squared?
a measure of how much return is due to the market calculate by squaring the correlation coefficient
30
what is systematic risk?
the lowest level of risk one could expect in a diversified portfolio
31
what is unsystematic risk?
the risk that exists in a specific firm or investment that can be eliminated through diversification
32
what is involved in systematic risk?
nondiversifiable risk market risk economy-based risk
33
what is involved in unsystematic risk?
diversifiable risk unique risk company specific risk
34
what are the systemic risks?
purchasing power risk reinvestment rate risk interest rate risk market risk exchange rate risk
35
what is purchasing power risk?
the risk that inflation will erode the amount of goods and services that can be purchased and a dollar today cannot purchase the same amount of goods the day after impacts both stocks and bonds
36
what is reinvestment rate risk?
the risk that an investor will nto be able to reinvest at the same rate of return that is currently being received mostly impacts bonds
37
what is interest rate risk?
the risk that changes in interest rates will impact the price of both equities and bonds
38
what is market risk?
impacts all securities in the short term bc the short term ups and downs of the market tend to take all securities in the same direction
39
what is exchange rate risk?
the risk that a change in exchange rates will impact the price of international securities
40
what are the unsystematic risks?
accounting risk business risk country risk default risk executive risk financial risk government/regulation risk
41
what is accounting risk?
the risk associated with an audit firm being too closely tied to the management of a company
42
what is business risk?
the inherent risk a company faces by operating in a particular industry
43
what is country risk?
the risk a company faces by doing business in a particular country
44
what is default risk?
the risk of a company defaulting on their debt payments
45
what is executive risk?
the risk associated with the moral and ethical character of the management running the company
46
what is financial risk?
the amount of financial leverage deployed by the firm
47
what is government/regulation risk?
the risk that tariffs or restrictions may be placed on an industry or firm that may impact the firm's ability to effectively compete in an industry
48
What measure of risk does the Capital Market Line use?
standard deviation
49
what measure of risk does the Security Market Line use?
beta
50
what is the Treynor Index?
uses the beta it is a risk adjusted performance measure it is a measure of how much return was achieved for each unit of risk the higher the ratio, the better aka more return for each unit of risk
51
what is the Sharpe Index?
uses the standard deviation it is a risk adjusted performance measure it is a measure of how much return was achieved for each unit of risk
52
what is the Jensen Model or Jensen's Alpha?
is essentially distinguishing a manager's performance relative to that of the market and determining differences between realized or actual returns and required returns as specified by CAPM it attempts to construct a measure of absolute performance on a risk - adjusted basis uses beta in the calculation
53
what does a positive Alpha indicate?
the fund manager provided more return than was expected for the risk undertaken
54
what does a negative Alpha indicate?
the fund manager provided less return than was expected for the risk undertaken
55
what does an alpha of zero indicate?
the fund manager provided a return equal to the return that was expected for the risk that was undertaken
56
a portfolio is considered diversified when r-squared is...
greater than or equal to 0.70
57
a portfolio is considered not well-diversified when r-squared is...
less than 0.70

My CFP Flashcards (18 decks)

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