SS 12: Portfolio Management

Question 1

____ is the most important measure of risk and measure the sensitivity of the derivatives’ price to small changes in the value of the underlying asset.

Answer 1

Delta

Question 2

Financial Leverage =

Answer 2

ROE
/
ROA

Question 3

___ will measure the impact of changes in volatility of the underlying asset on the derivative.

Answer 3

Vega

Question 4

Correlation coefficient =

Answer 4

Covariance(xy)
/
Standard deviation(x) * standard deviation(y)

Question 5

If an individual specifies they have a high level of risk tolerance and seek long-term wealth accumulation what investment goal would they most likely have?

Answer 5

Capital appreciation

Question 6

SML stands for:

Answer 6

Security Market Line

Question 7

Regarding the concept of mean-variance theory, the optimal portfolio is determined by each unique investor’s:

Answer 7

Risk preference

Question 8

ETFs have (higher/lower) expenses than mutual funds

Answer 8

Lower

Question 9

An investor’s optimal portfolio is where his highest utility curve is:

Answer 9

At a tangent to the efficient frontier

Question 10

Covariance of a security’s returns with the market return
/
Variance of market returns
=

Answer 10

Beta of a security

Question 11

The index weighting that results in portfolio weights shifting away from securities that have increased in relative value toward securities that have fallen in relative value whenever the portfolio is rebalanced is most accurately described as:

Answer 11

fundamental weighting

Fundamentally weighted indices generally will have a contrarian “effect” in that the portfolio weights will shift away from securities that have increased in relative value and toward securities that have fallen in relative value whenever the portfolio is rebalanced.

Question 12

Name 8 hedge fund strategies:

Answer 12

1. Convertible arbitrage
2. Dedicated short bias
3. Emerging markets
4. Equity market neutral
5. Event driven
6. Fixed-income arbitrage
7. Global macro
8. Long/short

Question 13

‘An estimate of MINIMUM loss from a trading position over a fixed time horizon that would be expected with a specified probability’ is a definition of:

Answer 13

Value at risk (VaR)

Question 14

The covariance between a risk-free asset and the market portfolio is:

Answer 14

0

Question 15

‘The people, processes and technology in place to track risk exposure of the organisation’ is a definition of:

Answer 15

Risk infrastructure

Question 16

Regarding endowments,

Time horizon is:

Risk tolerance is:

Liquidity needs are:

Answer 16

Time horizon is typically very long term

Risk tolerance is typically quite high

Liquidity needs are typically quite low

Question 17

IPS stands for:

Answer 17

Investment Policy Statement

Question 18

Diversification ratio:

Answer 18

A portfolio’s standard deviation of returns / the average standard deviation of returns of the individual securities int he portfolio

Question 19

To capture large changes in the value of the underlying, _____ is used. This is a second-order risk because it reflects the risk of changes in the delta.

Answer 19

Gamma

Question 20

The risk that arises when it becomes difficult to sell a security in a highly stressed market is called:

Answer 20

Liquidity risk

Question 21

The risk-free rate is where the SML intersects:

Answer 21

The Y-axis

Question 22

List 8 assumptions of Capital Market Theory

Answer 22

1. All investors are efficient
2. Investors borrow/lend money at the risk-free rate
3. The time horizon is equal for all investors
4. All assets are infinitely divisible
5. No taxes and transaction costs
6. All investors have the same probability for Outcomes
7. No inflation exists
8. There is no mispricing within the capital markets

Question 23

The slope of the SML is:

Answer 23

The market price of risk

Question 24

Tail risk is:

Answer 24

the risk that results from using inappropriate modeling assumptions such as assuming that returns are normally distributed

Question 25

Model risk is:

Answer 25

the risk of using the wrong model to analyze an investment or the risk of using the right model for the analysis but using it incorrectly

Question 26

‘Where exposure to a counterparty is positively related to the counterparty’s credit risk’

best describes:

Answer 26

Wrong-way risk

Question 27

Portfolios representing combinations of the risk-free asset and the market portfolio are plotted on the:

Answer 27

Capital market line

Question 28

STEPS IN THE PORTFOLIO MANAGEMENT PROCESS

Answer 28

The Planning Step

• Understanding the client’s needs
• Preparation of an investment policy statement (IPS)

The Execution Step

• Asset allocation
• Security analysis
• Portfolio construction

The Feedback Step

• Portfolio monitoring and rebalancing
• Performance measurement and reporting

Question 29

__ will measure the impact of a change in interest rates on the value of the derivative.

Answer 29

Rho

Question 30

The line that represents possible combinations of a risky asset and the risk-free asset is referred to as:

Answer 30

The capital allocation line (CAL)

Question 31

With regards to the inflation premium,

Nominal risk-free rate:

Real risk-free rate:

Answer 31

Nominal risk-free rate: Ignore inflation premium

Real risk-free rate: Add inflation premium