Portfolios Flashcards
What is an efficient portfolio? What is the risk measure used?
The efficient frontier consists of efficient portfolios. An efficient portfolio has the highest return for a given level of risk. The risk measure is standard deviation, specifically, the standard deviation of a multi-asset portfolio. Beta is not used in the calculation.
What are the disadvantages of a convertible bond? They are doubly cursed in times of _______________ and _______________ prices.
The holder may be forced into ______________ if the bond is callable.
The yield is ___________ than that of a non-convertible bond with similar risk and maturity
- high interest rates and low stock prices.
- conversion
- Less
What is the correlation between commodities and traditional assets?
Increasing commodity prices represent an increase in the cost of raw materials to corporations. Higher commodity prices have a negative impact on corporate profitability leading to lower stock prices.
What risk are US Treasury STRIPS not subject to? How are they taxed?
They are not subject to reinvestment rate risk. Because they do not have coupon payments, reinvestment rate risk is avoided, but its price is more volatile than coupon-paying bonds with similar maturities and ratings. Accrued interest income is taxable to the holder annually and is considered ordinary income.
US Treasury STRIPS permit investors to hold and trade the ________ and _______ components of eligible Treasury notes and bonds as separate securities.
Each interest payment and principal payment becomes a separate ___________________.
They are not subject to: _______________ risk or _________ risk.
They have virtually no __________ risk or _________risk.
- Interest and Principal
- zero-coupon security
- reinvestment rate risk or call risk
- liquidity risk or default risk
Investors generally seek investments with what type of skewness and distribution type?
Investors generally seek an investment with high positive skewness and a leptokurtic distribution.
Stocks exhibiting high positive skewness have a larger than average number of positive price movements. Investments exhibiting a leptokurtic distribution have more observations clustered around the mean, resulting in lower variance (standard deviation).
In Modern Portfolio theory, what does the optimal portfolio offer? Where does it lie on the efficient frontier?
The optimal portfolio offers the highest return for a given level of risk. It has the lowest risk for a given level of return. The optimal portfolio for an investor depends on their ability to assume risk. It will always lie on the efficient frontier, which is found at the point of tangency of the investor’s indifference curve and the efficient frontier.
What does the Sharpe ratio measure? What does it use as a measure of portfolio risk?
Total Risk (systematic and unsystematic). Standard Deviation
Sharpe’s ratio is based on the capital asset pricing model (CAPM) and the capital market line (CML). It is a relative measure of the risk-adjusted performance of a portfolio based on total risk (systematic and unsystematic). It uses standard deviation as a measure of portfolio risk.
What variable does Treynor use to measure risk?
Treynor uses beta, which is a measure of systematic or market risk, whereas Sharpe used standard deviation, which is a measure of total risk. Similar to Sharpe, it is a relative measure of the risk-adjusted rate of return of a portfolio, and is also based on the CAPM model. Since Treynor depends on beta, this ratio yields valid results only if beta is meaningful (R2 of at least 0.70).
What does Jensen’s Alpha measure?
How well a managed portfolio performed relative to an unmanaged portfolio
Jensen’s alpha is similar to Treynor and Sharpe in that it’s based on the CAPM. However, Jensen’s alpha is an absolute measure of performance, whereas Sharpe and Treynor are relative measures. Alpha denotes how well the managed portfolio performed relative to an unmanaged portfolio of equal risk when comparing actual vs. expected return. Like Treynor, only produces meaningful results when R2 is at least 0.70.
Sharpe’s ratio is useful for evaluating the performance of both ______________ and ______________ portfolios.
Sharpe’s ratio uses ______________ as measured by ______________.
- non-diversified and well-diversified portfolios.
- Total risk, Std. Dev.
In the bond ladder strategy, equal amounts of money are invested in a series of bonds with _____________________.
The laddered portfolio provides higher yields than a portfolio consisting entirely of ____________________.
- staggered maturities.
- short-term bonds.
The bond barbell strategy involves the purchase of a mixture of ____________ and ________________.
The barbell strategy is more ________________ than the ladder strategy.
- very long-term and very short-term bonds
- aggressive
Under Modern Portfolio Theory, an investor should evaluate a potential investment based on its effect on portfolio __________ and ___________
risk and return.
The security market line (SML) shows the relationship between the ____________ and ______________ risk.
- rate of return
- systematic risk (beta). It depicts a security’s expected return as a function of its systematic risk.
