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13 Cards in this Set
- Front
- Back
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What is portfolio theory?
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selection of optimal portfolio by rational risk averse investors
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What is capital markets theory?
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security prices based on decisions of investors
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How do you define risk?
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chance of achieving returns lower than expected
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1 Standard Deviation incorporates what percentage of expected values?
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95%
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How does correlation impact diversification?
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the less the correlation among security returns, the great the impact of diversification on reducing variability
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What is systematic risk?
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market related risk, not diversifiable, results from each and every security depending somewhat on the overall performance of the market
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What is unsystematic risk?
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risk that can be diversified
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What is the "law of one price"?
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assets with the same systematic risk should have the same expected rate of return
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What are the underlying assumptions of CAPM?
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1. people are risk averse
2. common time horizon 3. people have some expectations 4. no external/other frictional costs |
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What are the limitations of CAPM?
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assumes only risk is future security price; other risks: future labor income, future relative prices, future investment opportunities
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What is multifactor CAPM?
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takes in to consideration other risks, other than security price risk, "extra-market" risks
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What is the Arbitrage Pricing Theory (APT) model?
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security's expected return is influenced by a variety of factos; not just single market index of CAPM
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What are the possible APT factors for risk?
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1. unanticipated changes in industrial production
2. unanticipated changes in spread betweem yield on low grade and high grade bonds 3. unanticipated shape of the yield curve 4. unanticipated changes in inflation |
