Quant - Portfolio Math Flashcards

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1
Q

What risks impact a portfolio’s variance?

A
  1. the risk of the individual component assets
  2. their combined risks together as measured by their covariance
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2
Q

What is the formula for calculating the covariance of all objects within a portfolio?

A

A formula for computing the covariance between random variables RA and RB, such as the different assets of a portfolio, is

Cov(RA,RB)=∑i∑jP(RA,i,RB,j)(RA,i−ERA)(RB,j−ERB).

The value is derived by summing all possible deviation cross-products weighted by the appropriate joint probability.

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3
Q

What is “shortfall risk”?

A

portfolio value (or portfolio return) falling below some minimum acceptable level over some time horizon

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4
Q

What is Roy’s safety-first criterion?

A

Roy’s safety-first criterion states that the optimal portfolio minimizes the probability that portfolio return, RP, will fall below RL. For a portfolio with a given safety-first ratio (SFratio), the probability that its return will be less than RL is Normal(–SFRatio), and the safety-first optimal portfolio has the lowest such probability.

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