Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
58 Cards in this Set
- Front
- Back
|
portfolio perspective |
refers to evaluating individual investments by their contribution to the risk and return of an investor’s portfolio |
|
|
diversification ratio. |
calculated as the ratio of the risk of an equally weighted portfolio of n securities (measured by its standard deviation of returns) to the average single stock portfolio std dev |
|
|
defined contribution pension plan |
a retirement plan in which the firm contributes a sum each period to the employee’s retirement account |
|
|
defined benefit pension plan |
the firm promises to make periodic payments to employees after retirement |
|
|
three major steps in the portfolio management process: |
planning step execution step feedback step |
|
|
The planning step |
analysis of the investor’s risk tolerance, return objectives, time horizon, etc This analysis results in an investment policy statement (IPS) that details the investor’s investment objectives and constraints. updated any time objectives or constraints change |
|
|
The execution step |
involves an analysis of the risk and return characteristics of various asset classes to determine how funds will be allocated to the various asset types. Use top down and bottom up analysis to find investment opportunities |
|
|
feedback step |
Over time, investor circumstances will change, risk and return characteristics of asset classes will change, and the actual weights of the assets in the portfolio will change with asset prices. The portfolio manager must monitor these changes and rebalance the portfolio periodically |
|
|
Mutual funds |
one form of pooled investments (i.e., a single portfolio that contains investment funds from multiple investors) |
|
|
open-end fund |
investors can buy newly issued shares at the NAV. Newly invested cash is invested by the mutual fund managers in additional portfolio securities. Investors can redeem their shares (sell them back to the fund) at NAV as well. |
|
|
Closed-end funds |
professionally managed pools of investor money that do not take new investments into the fund or redeem investor shares. The shares of a closed-end fund trade like equity shares (on exchanges or over-the-counter). As with open-end funds, the portfolio management firm charges ongoing management fees |
|
|
Money market funds |
invest in short-term debt securities and provide interest income with very low risk of changes in share value. Fund NAVs are typically set to one currency unit, but there have been instances over recent years in which the NAV of some funds declined |
|
|
Bond mutual fund |
invest in fixed-income securities. They are differentiated by bond maturities, credit ratings, issuers, and types |
|
|
Index funds |
passively managed; that is, the portfolio is constructed to match the performance of a particular index, such as the Standard & Poor’s 500 Index |
|
|
Actively manage |
funds refer to funds where the management selects individual securities with the goal of producing returns greater than those of their benchmark |
|
|
Exchange-traded funds |
similar to closed-end funds in that purchases and sales are made in the market rather than with the fund itself. ETFs are most often invested to match a particular index (passively managed). Special redemption provisions for ETFs keep their market prices very close to their NAVs. |
|
|
ETF v closed end |
ETFs can be sold short, using margin, and traded intraday, open-end funds are typically sold and redeemed only daily, based on the share NAV With most ETFs, investors receive any dividend income on portfolio stocks in cash, while open-end funds offer the alternative of reinvesting dividends in additional fund shares |
|
|
ETF v closed end tax implications |
ETFs may produce less capital gains liability compared to open-end index funds. This is because investor sales of ETF shares do not require the fund to sell any securities. If an open-end fund has significant redemptions that cause it to sell appreciated portfolio shares, shareholders incur a capital gains tax liability. |
|
|
separately managed account |
a portfolio that is owned by a single investor and managed according to that investor’s needs and preferences. No shares are issued |
|
|
risk management process (3) |
1) identify the risk tolerance of the organization, 2) identify and measure the risks that the organization faces, and 3) modify and monitor these risks. |
|
|
risk management framework |
ALL 3 OF THE risk management process PLUS Establishing processes and policies for risk governance. Managing and mitigating risks to achieve the optimal bundle of risks. Monitoring risk exposures over time. |
|
|
Risk governance |
Refers to senior management’s determination of the risk tolerance of the organization, the elements of its optimal risk exposure strategy, and the framework for oversight of the risk management function |
|
|
risk tolerance |
setting the overall risk exposure the organization will take by identifying the risks the firm can effectively take and the risks that the organization should reduce or avoid. |
|
|
Risk budgeting |
process of allocating firm resources to assets (or investments) by considering their various risk characteristics and how they combine to meet the organization’s risk tolerance. |
|
|
Financial risks |
Credit (counterparty) risk Liquidity risk Market (loss) risk aka uncertainty about asset prices |
|
|
non financial risks |
Operational risk, Solvency ris, Regulatory risk. gov risk, Legal risk, model risk, tail risk, accounting risk also mortality and longevity risks |
|
|
Standard deviation |
measure of the volatility of asset prices and interest rates. Standard deviation may not be the appropriate measure of risk for non-normal probability distributions |
|
|
Beta |
measures the market risk of equity securities and portfolios of equity securities |
|
|
Duration |
a measure of the price sensitivity of debt securities to changes in interest rates. |
|
|
Value at risk (VaR) |
minimum loss over a period that will occur with a specific probability. ex: 1 week VAR =200 @ 3% prob. 3% of all weeks EXPECT to lose 200 or more NOT the maximum one-week loss the bank will experience |
|
|
Conditional VaR (CVaR) |
the expected value of a loss, given that the loss exceeds a minimum amount. ex: in the 3% scenario, how big will the actual loss be probability-weighted average loss for all losses expected to be at least 200 million euros |
|
|
Stress testing |
examines the effects of a specific (usually extreme) change in a key variable such as an interest rate or exchange rate |
|
|
Scenario analysis |
what-if analysis of expected loss but incorporates changes in multiple inputs. A given scenario might combine an interest rate change with a significant change in oil prices or exchange rates. |
|
|
self-insurance |
imply means that it will bear any associated losses from this risk factor. It is possible that this represents inaction rather than the result of analysis and strategic decision making |
|
|
risk transfer |
risk an organization has decided not to bear, risk transfer or risk shifting can be employed ex The risk of fire destroying a warehouse complex is shifted to an insurance company by buying an insurance policy |
|
|
surety bond |
, an insurance company has agreed to make a payment if a third party fails to perform under the terms of a contract or agreement with the organization |
|
|
fidelity bonds |
which will pay for losses that result from employee theft or misconduct. |
|
|
Risk shifting |
way to change the distribution of possible outcomes and is accomplished primarily with derivative contracts. For example, financial firms that do not want to bear currency risk on some foreign currency denominated debt securities can use forward currency contracts |
|
|
Real return |
nominal return adjusted for inflation |
|
|
two-fund separation theorem |
states that all investors’ optimum portfolios will be made up of some combination of an optimal portfolio of risky assets and the risk-free asse |
|
|
capital market line |
Under the assumption of homogeneous expectations, this optimal CAL for all investors |
|
|
Return generating models |
used to estimate the expected returns on risky securities based on specific factors. |
|
|
Multifactor models |
commonly use macroeconomic factors such as GDP growth, inflation, or consumer confidence, along with fundamental factors such as earnings, earnings growth, firm size, and research expenditures |
|
|
beta |
The sensitivity of an asset’s return to the return on the market index in the context of the market model Cov of asset return with market return / variance of mkt return correlation * std dev portfolio / std dev mkt |
|
|
Comparing the CML and the SML |
CML uses total risk = σp on the x-axis, E(R) on the Y. only efficient portfolios will plot on the CML SML uses beta (systematic risk) on the x-axis. all properly priced securities and portfolios of securities will plot on the SML |
|
|
M-squared |
produces the same portfolio rankings as the Sharpe ratio but is stated in percentage terms. [ (Rp - Rf) *( std dev M / Std dev p) ] - (RM-Rf) |
|
|
Treynor measure |
(Return p - risk free )/ beta |
|
|
Jensen’s alpha. |
αP = Rp – [Rf + βP(RM – Rf)] the percentage portfolio return above that of a portfolio (or security) with the same beta as the portfolio that lies on the SML |
|
|
security market line (SML) |
a graphical representation of the CAPM that plots expected return versus beta for any security. |
|
|
CAL- capital allocation line |
On a graph of return versus risk, the various combinations of a risky asset and the risk-free asset form the capital allocation line |
|
|
(CML)- capital market line |
Returns vs Std dev. Std dev = total risk In the specific case where the risky asset is the market portfolio, the combinations of the risky asset and the risk-free asset form the capital market line |
|
|
investment policy statement |
typically begin with the investor’s goals in terms of risk and return. These should be determined jointly, as the goals of high returns and low risk (while quite popular) are likely to be mutually exclusive in practice |
|
|
investment policy statement includes |
Description of Client Statement of the Purpose Statement of Duties and Responsibilities Procedures Investment Objective, Constraints, Guidelines Evaluation of Performance |
|
|
absolute risk objectives in IPS |
ex: “have no decrease in portfolio value during any 12-month period” or to “not decrease in value by more than 2% at any point over any 12-month period |
|
|
Relative risk objective |
relate to a specific benchmark |
|
|
ability to bear risk vs willingness to.. |
ability depends on financial circumstances vs willingness depends on preferences |
|
|
R-R-T-T-L-L-U |
Risk, Return, Time horizon, Tax situation, Liquidity, Legal restrictions, and the Unique constraints |
|
|
core-satellite approach |
invests the majority, or core, portion of the portfolio in passively managed indexes and invests a smaller, or satellite, portion in active strategies |
