Security Analysis Quiz 1 Flashcards
Value-weighted index
Based on market value of equity. (A = 500 mil equity, B = 100 mil equity, so A has 5x weight)
Sharpe Ratio Definition
Divides average portfolio excess return over the sample period by the standard deviation of returns over that period. Looks at total risk.
Sharpe Ratio Formula
(Rp - Rf) / SD of portfolio
Treynor Measure Definition
Is a ratio of excess return to beta, like the Sharpe ratio, but it uses systematic risk (beta) instead of total risk (standard deviation).
Treynor Measure Formula
(Rp - Rf) / Beta
Beta is weighted average Beta for portfolio
Jensen’s Measure Formula
Alpha = Rp - [Rrf + (Rmktp - Rrf)(Beta)]
Jensen’s Alpha Definition
The average return on the portfolio over and above that predicted by the CAPM, given the portfolio’s beta and the average market return.
Systematic risk…
CANNOT be diversified away
Non-systematic risk…
CAN be diversified away. Individual companies have nonsystematic risk.
If P is not diversified…
then use the Sharpe measure as it measures reward to risk.
If P is diversified…
non-systematic risk is negligible and the appropriate measure is Treynor’s, measuring excess return to beta.
Use Alpha to determine…
if a portfolio should be mixed with the benchmark portfolio
Ask price
Lowest price somebody (dealer) is willing to sell a share.
Bid price
Highest price somebody (dealer) is willing to buy a share.
Highest price somebody is willing to buy a share.
Bid Price
Limit Sell Order
Sell if and when the stock price rises ABOVE a specified limit.
Limit Buy Order
Buy if and when the stock price goes AT OR BELOW a stipulated price.
Utility goes UP with…
expected return
Utility goes DOWN with…
variance
Coefficient of Risk Aversion (A)
Unique to individual. Low if you hate risk, high if you are ok with risk.
Risk-free portfolios (with variance = 0) receive a utility score equal to…
their rate of return because they receive no penalty for risk.
Order type: Buy - price falls below limit
Limit buy
Order type: Buy - price rises above limit
stop buy
Order type: Sell - price falls below limit
Stop loss
Order type: Sell - price rises above limit
Limit Sell
