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19 Cards in this Set
- Front
- Back
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Capital Market Line
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the CAL with the market as the tangency portfolio
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Security Market Line
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plots the expected return of assets against their beta
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SML or CML?...shows the total risk and only has two securities lying on it?
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CML
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SML or CML?...shows systematic risk only and has ever security lying on it?
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SML
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What is an asset's alpha?
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the difference between its actual risk premium and its risk premium predicted by the CAPM
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if an asset is above the SML is it under or overpriced?
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underpriced
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What things did Fama and French find that helped explain returns?
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firm sive (ME = market value of equity), book-to-market ratio (B/M = book value of equity/market value of equity)
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What are the basic steps of the black-litterman approach?
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1) estimate variances and covariance. 2) calculate neutral expected returns based on these estimates using CAPM. 3) specify "views" about departures from these neutral returns and your level of confidence. 4) revise expectations about asset returns based on these views. 5) compute the optimal portfolio using this new set of expected returns as inputs
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What does the single-factor model assume?
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the comovement between stocks is due to a single common influence
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Well-diversified portfolio
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a portfolio that is diversified over a large number of securities with each weight w(1) small enough so that the nonsystematic variance is negligible
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Law of One Price
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if two assets are equivalent in all economically relevant aspects, they should have the same price / expected return
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Arbitrage Opportunity
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a self-financing investment strategy that yields a riskless profit
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What are the three Fama-French factors?
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RM-RF, SMB, HML
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Efficient market
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a market that efficiently processes information
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Weak-form efficiency
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stock prices reflect all information contained in trading data such as past prices, trading volume, or short interest
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Semistrong-form efficiency
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stock prices reflect all publicly available information
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strong-form efficiency
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stock prices reflect all information relevant to the firm, public or private
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Post-Earnings announcment drift
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stock prices respond slowly to firms' earnings announcements
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What are two common mistakes of investors?
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excessive trading (the trading profits of individual investors are insufficient to cover trading costs) and Disposition effect (investors tend to sell their winning investments too soon and hold their losing investments too long)
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