Portfolio Management

Front 1

Capital Asset Pricing Model
CAPM

Back 1

RFR + b (market - RFR)

CAPM can be also considered a special case of APT
where there is only one risk factor and this

Front 2

Standard deviation of investment that
combines risky with risk-free?

Back 2

Front 3

Market Model Predicts

Back 3

Front 4

Strategies

Back 4

THINK: BICCCO

Basis
Index
Curve
Correlation
Capital Structure
Options

Front 5

Law of one price

Back 5

A good should have the same real price in all countries

Front 6

beta =

Back 6

Front 7

Active Return

Back 7

portfolio - benchmark

Front 8

Sources of Active Return

Back 8

1. Factor tilts
2. Asset Allocation

Front 9

Active Risk

Back 9

Standard deviation of active return over time
Standard deviation of portfolio - benchmark

Front 10

Information Ratio

Back 10

Active Return........Portfolio - Benchmark...
--------------- = ---------------------------
.Active Risk......standard deviation of p - b

Front 11

FCRP

Back 11

Foreign Currency Risk Premium

Front 12

RFR has what standard deviation/variance?
and covariance with other assets?

Back 12

All Zero

Front 13

Expected Return on 2 asset portfolio

Back 13

Front 14

Expected Return Two Assets one being RFR

Back 14

Front 15

Variance of two assets

Back 15

Front 16

Variance of equally-weighted portfolios

Back 16

Front 17

Lower correlation leads to what diversification?

Back 17

Greater

Front 18

alpha

Back 18

Forecast - CAPM

Front 19

Foreign Currency Risk Premium

Back 19

Front 20

2 Ways to calc domestic currency (DC) return to
holding foreign bond

Back 20

1. DC return = FC interest + FC appreciation
2. DC return = DC interest + Foreign Currency Risk Premium (FCRP)

Front 21

Money Demand Model

Back 21

Inc real econ activity leads to inc demand domestic currency,
currency appreciates, stock prices up

Dec econ activity causes currency depreciation, stock prices down

Front 22

Traditional Model

Back 22

Decrease currency lead to strong economy in
long run

Front 23

Security Market Line (SML)

Back 23

Expected return vs. Beta

Slope is the market risk premium (Mkt-RFR)

Intercept is the RFR

Inc expected inflation or RFR moves line up

Front 24

Capital Market Line (CML)

Back 24

Expected return vs. variance

This is a line.

Market portfolio (M) is the tagency portfolio
of the RFR line to the efficient frontier.

At RFR 100% lending (T-bills), at M 100% funds in tagency
portfolio, above M on RFR line borrowing since more than
100% invested.

Slope = sharpe ratio of market portfolio

"Best combination of risk reward"

Front 25

SML vs CML
Security Market Line vs. Capital Market Line

Back 25

Front 26

Capital Market Line (CML) equation

Back 26

Front 27

Capital Allocation Line (CAL) equation

Back 27

Front 28

Minimum-Variance Frontier (MVF)

Back 28

Expected Return vs. Variance

Set of portfolios with lowest variance at expected return

Front 29

Capital Allocation Line (CAL)

Back 29

Expected return vs. variance

CAL is the line from the risk-free rate (RFT)
to the point of tagency on the efficient frontier

"Best risk portfolio"

Front 30

Capital Allocation Line (CAL) equation

Back 30

Front 31

Differences between CAL and CML

Back 31

1. Only one CML - the tagency is the market portfolio
2. Unlimited CALs, each developed unique per investor
3. Tangency for CAL can differ accros investors depending
on expectations.
4. CML is a special case of CAL. CML is the "Market Portfolio"

Front 32

Market Model

Back 32

the regression mode used to estimate beta

Return = alpha + (beta)(return on market) + error

Front 33

Multifactor Models. Give 3 types:

Back 33

Market Model is 1 factor model. Assests explained by return of
market porfolio

1. Macroeconomic
2. Fundamental
3. Statistical

Front 34

International CAPM
ICAPM

Back 34

Front 35

In ICAPM R sub f
is

Back 35

domestic currency risk free rate

Front 36

Market Price of Risk

Back 36

= Sharpe ratio of market portfolio
= Slope of CML (Capital Market Line)
= Market risk premium per unit of market risk

Front 37

If CAPM assumptions don't hold

Back 37

1. Market Porfolio not on efficient frontier
2. non-linear relation expected return and beta
3. Not allowing shorts
4. Risk adverse investor may hold diff then more risk-adverse
investor

Front 38

Portfolio Management Planning Process

Back 38

Analyse
1. Risk/Return
2. Constraints: Liquidity, time horizion, legal/regulation,
taxes, unique circum
3. Develop IPS: purpose, duties, objectives, modify policy,
rebalancing guidlines
4. Determine Strategy: Passive/Active
5. Select Asset Allocations: Weight based on capital market expectations