SS 12: Portfolio Management Flashcards
____ 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.
Delta
Financial Leverage =
ROE
/
ROA
___ will measure the impact of changes in volatility of the underlying asset on the derivative.
Vega
Correlation coefficient =
Covariance(xy) / Standard deviation(x) * standard deviation(y)
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?
Capital appreciation
SML stands for:
Security Market Line
Regarding the concept of mean-variance theory, the optimal portfolio is determined by each unique investor’s:
Risk preference
ETFs have (higher/lower) expenses than mutual funds
Lower
An investor’s optimal portfolio is where his highest utility curve is:
At a tangent to the efficient frontier
Covariance of a security’s returns with the market return
/
Variance of market returns
=
Beta of a security
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:
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.
Name 8 hedge fund strategies:
- Convertible arbitrage
- Dedicated short bias
- Emerging markets
- Equity market neutral
- Event driven
- Fixed-income arbitrage
- Global macro
- Long/short
‘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:
Value at risk (VaR)
The covariance between a risk-free asset and the market portfolio is:
0
‘The people, processes and technology in place to track risk exposure of the organisation’ is a definition of:
Risk infrastructure
Regarding endowments,
Time horizon is:
Risk tolerance is:
Liquidity needs are:
Time horizon is typically very long term
Risk tolerance is typically quite high
Liquidity needs are typically quite low
IPS stands for:
Investment Policy Statement
Diversification ratio:
A portfolio’s standard deviation of returns / the average standard deviation of returns of the individual securities int he portfolio
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.
Gamma
The risk that arises when it becomes difficult to sell a security in a highly stressed market is called:
Liquidity risk
The risk-free rate is where the SML intersects:
The Y-axis
List 8 assumptions of Capital Market Theory
- All investors are efficient
- Investors borrow/lend money at the risk-free rate
- The time horizon is equal for all investors
- All assets are infinitely divisible
- No taxes and transaction costs
- All investors have the same probability for Outcomes
- No inflation exists
- There is no mispricing within the capital markets
The slope of the SML is:
The market price of risk
Tail risk is:
the risk that results from using inappropriate modeling assumptions such as assuming that returns are normally distributed
Model risk is:
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
‘Where exposure to a counterparty is positively related to the counterparty’s credit risk’
best describes:
Wrong-way risk
Portfolios representing combinations of the risk-free asset and the market portfolio are plotted on the:
Capital market line
STEPS IN THE PORTFOLIO MANAGEMENT PROCESS
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
__ will measure the impact of a change in interest rates on the value of the derivative.
Rho
The line that represents possible combinations of a risky asset and the risk-free asset is referred to as:
The capital allocation line (CAL)
With regards to the inflation premium,
Nominal risk-free rate:
Real risk-free rate:
Nominal risk-free rate: Ignore inflation premium
Real risk-free rate: Add inflation premium
