PORTOLIO MANAGEMENT Flashcards
Describe the Risk Toleranze, Inv Horizon, Liquidity Needs, and Income Needs of:
- Individuals
- Banks
- Endowments
- Insurance
- Mutual Funds
- Defined Benefit Pension
Investor Type | Risk Tolerance | Investment
Horizon | Liquidity Needs | Income Needs |
| — | — | — | — | — |
| Individuals | depends | depends | depends | depends |
| Banks | Low | Short | High | Pay Interest |
| Endowments | High | Long | Low | Spending Level |
| Insurance | Low | Long - Life
Short - P&C | High | Low |
| Mutual Funds | depends on fund | depends on fund | High | depends on fund |
| Defined Benefit Pension Plan | High | Long | Low | Depends on Age |
What are the 3 steps of the portfolio management process?
- Planning, Determine IPS (investment policy statement); review and update periodically
-
Execution,
- Top Down, determine stuiabble allocations to various asset classes based on IPS, and on expectations of marcroeconomic variables.
- Bottom Up, Identify attractively priced securities within an asset class for client portfolios based on valuation estaimates from the securty analysts.
- Feedback, Monitor and rebalance the portfolio to adjust asset class allocations and sec. holdings in response to market performance, then measure and report relative to performance benchmark specified in the IPS.
In finance, what is the difference in between population variance and sample variance of samples of returns?
The denominator, instead of only T, is T-1.
Taken together, the portfolio combinations with minimum variance form a line called _______.
the Minimum-Variance frontier
On a risk (x) vs return (y) graph, the portfolios holding the greatest E(R) for each level of risk, make up the _________.
Efficient Frontier.
The simplest return generating model is the ______ model, and assumes the the return on an asset is related to the return on the ______ portfolio in the following manner:
Ri = α_i + β_iR_m + e_i
The _______________ is the graphical representation of the CAPM taht plots E(R) vs Beta for any security.
Security Market Line
The ____ and the ____ indicate what a security’s eq. required rate of return should be based on the secrutiy’s exposure to market risk. This can help devermine whether the security is __________ valuled.
CAPM; SML; properly
the process of identifying and measuring risks faced by a pm or individual, establishing risk tolerance, deciding which risks to take and to avoid, and putting structure in place to maintain combined risk expected to best achieve the goals of the pm or individual is:
risk management
Changing the distribution of uncertain outcomes with derivatives is known as:
Shift Risk
Based on the capital market theory, and investor should choose a portfolio that maximizes his_____.
Utility.
