Principles of Investment - Risk & Return Flashcards
Define Risk Premium
Additional return that is required by investors for taking on the risk of the investments
Define Systematic Risk
The risk that an entire financial system of market may collapse
Define Financial Gearing
Describes the relationship between the amount of debt taken out by a firm to finance activities
Define Unsystematic Risk
Known as a specific/unique risk and relate to a particular business investment or share
Define counterparty risk
risk that a counterparty in a transaction cannot honour its financial obligations
Define Market Capitalisation
Larger companies can be more insulated from economic downturns than smaller ones
What is ESG investing
ESG refers to Environmental, Social and Governance & addressing one of these dimensions for sustainable investing
Define Corporate Governance
Refers to the way in which businesses are directed and controlled
How is standard deviation used
It measures how widely the investment is dispersed around its mean or average
Higher the SD the greater the risk
How is the money rated return formula used
Measure the performance of an investment that has had deposits and withdrawals during the period of investment
How is time-weighted rate of return used
Refers to the fact returns are averaged over time and removes impact of cash flow
How does the sharpe ratio work
compares rate of return with its risk
How is Jensen Alpha used
It is employed to evaluate the performance of a well-diversified portfolio against a CAPM benchmark
What is CAPM
financial model that calculates the expected rate of return for an asset or investment
What is the Efficient Market Hypothesis
It is a theory that puts forward all available and relevant info about a security and is reflected in the security’s value
What are the underpinnings of the Modern Portfolio Theory
- Investors will demand higher returns for investors to invest in riskier assets
- Diversifying a portfolio by adding investments which do not behave in the same way to reduce risk
What does the efficient frontier represent?
Curve shows the different rates of return against the amount of risk
What is Fama-French Three Factor model
aims to describe stock returns through - company size, book-to-market values, excess returns on market
What is the use of Beta
expression of a funds sensitivity to movements in the benchmark index
What is the use of Alpha
measures the difference between funds actual returns and expected returns
What is Top down strategy and what are its stages
Involves the manager considering the bigger picture and asset allocation, sector selection and stock selection
What is bottom-up management
focuses solely on unique attractions of individual stocks
What is a Passive strategy
A method which seeks to maximise returns by minimising buying and selling
Name some Passive strategies
Buy & Hold and Indexation (replicating the performance of market index)
