Risk And Return II Flashcards
Capital MARKET Line (CML) is a line that combines RF assets with
Market Portfolio 🤘
Portfolios ploted Above CML are
Unachievable
CML are the specific case where Risky asset = ?
What is the measure of risk?
1.The Market Portfolio
2 Stnd. Deviation
Securities ABOVE SML are?
And BELOW are?
Above = overvalued
Below = undervalued
Scenarios to short a security (related to SML and Jensen alpha )
Above SML = overrated. Go short
NEGATIVE jensen Alpha = negative Return.
Go short
CML is the line that shows…
Tradeoff of risk/return of various combinations of
Market portfolio &
Riskless asset
SML are the line that shows…
What is the measure of risk?
The risk / return tradeoff of
Individual security / portfolio
Beta
What are the Three factor os Fama and French
And what Carhart add?
Firm size,
market to book
Excess return
Momentum price was added
SML and CAPM exercise:
Wich one is Hding period ?
Wich one is the actually Required Return?
When the asset is under or overvalued
Holding period = return given in the text
Required Rate of Return = CAPM
If
Holding P > CAPM - Overvalued
Holding = CAPM - ok
Holding < CAPM - Undervalue
About Capital Market, investor optimal portfolio is the combination on a Risk Asset and Rf has the highest:
UTILITY
And consecutively
Indifference Curve
**Investor will have differents optimal portfolios, depending on the indifference curve
Beta fórmulas (2)
B = correl (std.Dev Asset)
———————-
(Std. Dev. Market)
B = Covariance (asset, market)
—————————————
(StdDev. Market)^2
Investor are compensated over wich type of rysk?
Systematic. THE ONLY RISK PRECIFIED
Unsystematic is the risk that you can mitigate
Market model formula:
Ri = alpha i + Beta i . (R market) + Ei
Alpha = intercept
Beta = slope
Ei = specific return
If BETA NEGATIVE
with de CAPM method, expected return is less or high than Risk Free rate?
Less
What is the relation about SML and CAPM?
SML is the graphic representation of CAPM
What are the assumptions that allows the Market Portfolio Existis? (4)
Same:
WIEGHTS - Probability distribution
FCF - Inputs of future cash flows
Valuations
——————-
Frictionless market (no restrictions on short selling)
———————
Consequently
Optimal risky portfolio
What is the performance method consistent with CAPM?
Jensen alpha (adjust for systematic risk)
M2 = “sharpe” adjusted for risk return
Expressed as a percentage, not Slope
Jensen alpha is the fit line formed by plotting the excess return of wich personas?
Portfolio manager + excess return of the market
What is the best measure return for a FULLY DIVERSED portfolio? Why?
Treynor and Jensen
The portfolio fully diversified, only risk that matters is systematic.
Ploted expected return (measure of risk )measure of:
CML?
SML?
CML = std dev
SML = Beta
What is the costs of transactions and taxes assumption over CAPM?
ZeRo 4Evá
What is the other measure of total risk?
Variance.
