Risk And Return II Flashcards

1
Q

Capital MARKET Line (CML) is a line that combines RF assets with

A

Market Portfolio 🀘

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2
Q

Portfolios ploted Above CML are

A

Unachievable

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3
Q

CML are the specific case where Risky asset = ?

What is the measure of risk?

A

1.The Market Portfolio

2 Stnd. Deviation

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4
Q

Securities ABOVE SML are?
And BELOW are?

A

Above = overvalued

Below = undervalued

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5
Q

Scenarios to short a security (related to SML and Jensen alpha )

A

Above SML = overrated. Go short

NEGATIVE jensen Alpha = negative Return.
Go short

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6
Q

CML is the line that shows…

A

Tradeoff of risk/return of various combinations of

Market portfolio &
Riskless asset

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7
Q

SML are the line that shows…

What is the measure of risk?

A

The risk / return tradeoff of

Individual security / portfolio

Beta

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8
Q

What are the Three factor os Fama and French

And what Carhart add?

A

Firm size,
market to book
Excess return

Momentum price was added

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9
Q

SML and CAPM exercise:
Wich one is Hding period ?
Wich one is the actually Required Return?
When the asset is under or overvalued

A

Holding period = return given in the text

Required Rate of Return = CAPM

If

Holding P > CAPM - Overvalued

Holding = CAPM - ok

Holding < CAPM - Undervalue

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10
Q

About Capital Market, investor optimal portfolio is the combination on a Risk Asset and Rf has the highest:

A

UTILITY

And consecutively

Indifference Curve

**Investor will have differents optimal portfolios, depending on the indifference curve

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11
Q

Beta fΓ³rmulas (2)

A

B = correl (std.Dev Asset)
β€”β€”β€”β€”β€”β€”β€”-
(Std. Dev. Market)

B = Covariance (asset, market)
β€”β€”β€”β€”β€”β€”β€”β€”β€”β€”β€”β€”β€”
(StdDev. Market)^2

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12
Q

Investor are compensated over wich type of rysk?

A

Systematic. THE ONLY RISK PRECIFIED

Unsystematic is the risk that you can mitigate

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13
Q

Market model formula:

A

Ri = alpha i + Beta i . (R market) + Ei

Alpha = intercept
Beta = slope

Ei = specific return

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14
Q

If BETA NEGATIVE
with de CAPM method, expected return is less or high than Risk Free rate?

A

Less

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15
Q

What is the relation about SML and CAPM?

A

SML is the graphic representation of CAPM

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16
Q

What are the assumptions that allows the Market Portfolio Existis? (4)

A

Same:
WIEGHTS - Probability distribution
FCF - Inputs of future cash flows
Valuations
β€”β€”β€”β€”β€”β€”-
Frictionless market (no restrictions on short selling)
β€”β€”β€”β€”β€”β€”β€”
Consequently

Optimal risky portfolio

17
Q

What is the performance method consistent with CAPM?

A

Jensen alpha (adjust for systematic risk)

M2 = β€œsharpe” adjusted for risk return
Expressed as a percentage, not Slope

18
Q

Jensen alpha is the fit line formed by plotting the excess return of wich personas?

A

Portfolio manager + excess return of the market

19
Q

What is the best measure return for a FULLY DIVERSED portfolio? Why?

A

Treynor and Jensen

The portfolio fully diversified, only risk that matters is systematic.

20
Q

Ploted expected return (measure of risk )measure of:

CML?
SML?

A

CML = std dev
SML = Beta

21
Q

What is the costs of transactions and taxes assumption over CAPM?

A

ZeRo 4EvΓ‘

22
Q

What is the other measure of total risk?

A

Variance.