Quantitative Investment Concepts Flashcards
What is a normal distribution of returns?
Represented by bell shaped curve
Single peak in the center and is the location of arithmetic mean, median, and mode
Symmetric about mean - 50% chance that an observation will fall to the right of the mean, 50% chance will fall to the left of the mean
What is the mean (arithmetic mean)?
Some of observations divided by number of observations
What is the median?
Midpoint of the values after they have been ordered from the smallest to the largest
What is the mode?
Observation that appears with the greatest frequency
What is a positively skewed distribution?
Skewed to the right longer tail going right
Mean is the highest of the three measures, followed by the median, then the mode
More outliers to the right of the mean
What is a negatively skewed distribution?
Skewed to the left with a longer left tail
Mode is the largest of the three measures, followed by the median, then the mean
More outliers to the left of the mean then to the right
What is kurtosis distributions and what are the two types?
Measures whether a distribution is more or less than a normal distribution
Leptokurtic:
More Peaked than normal distribution, more observations cluster closely around the mean, investors, who want to minimize volatility in their portfolios would prefer a leptokurtic distribution
Platykurtic:
Less peaked than a normal distribution, more observations with large deviations from the mean
For an investor to get proper diversification an investor should attempt to realize the greatest amount of return per unit of risk. This may be accomplished how?
Structuring a portfolio that contains assets with low correlation to each other
Having a longer investment time horizon
Or both
As the number of stocks in a portfolio increases the level of unsystematic risk does what
Declines
What is diminishing returns by adding an additional stock to a portfolio
Adding an additional stock to a portfolio with only five stocks will have a greater impact on the level of diversification than adding an additional stock to a portfolio of 30 stocks
What is covariance?
Measures the extent to which two Returns on investment assets moved together, either positively (together) or negatively (opposite)… it is a necessary step in calculating the correlation coefficient
What is the covariance formula?
What is the correlation coefficient?
Measures the extent to wish the returns on any two securities are related
Overall range is +1 to -1
R = -1.0 securities moving opposite direction at the same time, completely remove risk
R = +1.0 movement between securities is identical, and rate and direction, no reduction in the risk of portfolio
R = 0.0 security movements are unrelated to one another
What is the correlation coefficient formula?
What is the coefficient of determination?
R squared
Describes the percentage of variability of a stock that is explained by changes in the overall market
R squared = 1 between a portfolio and the market portfolio contains no unsystematic risk
If R-squared is >= .70 Beta is reliable, less Beta is not meaningful
To select an appropriate benchmark, the most appropriate benchmark for any given portfolio is the benchmark with the highest R-relative to the portfolio
What is the formula for beta?
An example of getting a weighted beta from a portfolio
What is statistical risk analysis?
Distribution of returns for various assets is usually symmetrically distributed around the mean of the returns, distribution forms bell shaped curve
How do you calculate standard deviation of historical returns using the financial calculator?
What is the standard deviation formula of a two asset portfolio?
