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My CFP Flashcards > portfolio theory > Flashcards

portfolio theory Flashcards

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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 …

A

1

25
Q

a stock with a beta of 1 means….

A

the stock will be expected to mirror the market in terms of direction, return and flucuation

26
Q

a stock with a beta of more than 1 means…

A

the stock fluctuates more than the market and greater risk is associated with that particular security

27
Q

a stock with a betta of less than 1 means….

A

the securities fluctuates less relative to market movements

28
Q

beta is a measure of ……. risk while standard deviation is a measure of ……. risk

A

beta = market risk
standard deviation = total risk

29
Q

what is r squared?

A

a measure of how much return is due to the market

calculate by squaring the correlation coefficient

30
Q

what is systematic risk?

A

the lowest level of risk one could expect in a diversified portfolio

31
Q

what is unsystematic risk?

A

the risk that exists in a specific firm or investment that can be eliminated through diversification

32
Q

what is involved in systematic risk?

A

nondiversifiable risk
market risk
economy-based risk

33
Q

what is involved in unsystematic risk?

A

diversifiable risk
unique risk
company specific risk

34
Q

what are the systemic risks?

A

purchasing power risk
reinvestment rate risk
interest rate risk
market risk
exchange rate risk

35
Q

what is purchasing power risk?

A

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
Q

what is reinvestment rate risk?

A

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
Q

what is interest rate risk?

A

the risk that changes in interest rates will impact the price of both equities and bonds

38
Q

what is market risk?

A

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
Q

what is exchange rate risk?

A

the risk that a change in exchange rates will impact the price of international securities

40
Q

what are the unsystematic risks?

A

accounting risk
business risk
country risk
default risk
executive risk
financial risk
government/regulation risk

41
Q

what is accounting risk?

A

the risk associated with an audit firm being too closely tied to the management of a company

42
Q

what is business risk?

A

the inherent risk a company faces by operating in a particular industry

43
Q

what is country risk?

A

the risk a company faces by doing business in a particular country

44
Q

what is default risk?

A

the risk of a company defaulting on their debt payments

45
Q

what is executive risk?

A

the risk associated with the moral and ethical character of the management running the company

46
Q

what is financial risk?

A

the amount of financial leverage deployed by the firm

47
Q

what is government/regulation risk?

A

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
Q

What measure of risk does the Capital Market Line use?

A

standard deviation

49
Q

what measure of risk does the Security Market Line use?

A

beta

50
Q

what is the Treynor Index?

A

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
Q

what is the Sharpe Index?

A

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
Q

what is the Jensen Model or Jensen’s Alpha?

A

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
Q

what does a positive Alpha indicate?

A

the fund manager provided more return than was expected for the risk undertaken

54
Q

what does a negative Alpha indicate?

A

the fund manager provided less return than was expected for the risk undertaken

55
Q

what does an alpha of zero indicate?

A

the fund manager provided a return equal to the return that was expected for the risk that was undertaken

56
Q

a portfolio is considered diversified when r-squared is…

A

greater than or equal to 0.70

57
Q

a portfolio is considered not well-diversified when r-squared is…

A

less than 0.70

My CFP Flashcards (18 decks)

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