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CIMA > Portfolio Theories and Models > Flashcards

Portfolio Theories and Models Flashcards

1
Q

Key MPT Assumptions

A

Normal distributions

Fixed correlations

Rational investors and risk averse

Risk is known and constant

All info is public

No taxes or transactions costs

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2
Q

Market risk premium defined

A

the risk premium on the market portfolio will be proportional to its risk and the degree of risk aversion of the investor

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3
Q

Mean variance optimization developed by

A

Harry Markowitz

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4
Q

MVO defined

A

quantitative model designed to select securities for inclusion in an optimal portfolio that maximizes return for a stated level of risk

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5
Q

Necessary inputs for MVO

A

Securities expected returns
Expect risk (SDEV)
expected cross security correlations

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6
Q

MVO portfolio optimization includes

A

maximize return and minimize risk

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7
Q

Portfolios on the mean variance efficient frontier are found by

A

searching for the portfolio with the least variance given some minimum return

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8
Q

Efficient Frontier defined

A

a set of optimal portfolios with the highest expected return for a set or defined amount of risk as measured by SDEV

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9
Q

Efficient frontier demonstrates what

A

Best use of investment capital “IF” optimizing for risk-adjusted return is the objective

more effective diversification

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10
Q

Capital asset line defined

A

line represents all possible combination of risk free and risk assets; represents possible returns by taking on different levels of risk

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11
Q

Capital asset line also commonly called

A

capital allocation line

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12
Q

Brinson Beebower and Hood

A

Asset allocation is the primary determinant of a portfolio’s return variability

Securities selection and market timing played only a minor role in portfolio performance

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13
Q

Black - Litterman Model combines

A

CAPM, MPT and MVO

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14
Q

Black Litterman Model allows what

A

flexibility to change data and add more data points

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15
Q

Efficeint market hypothesis says what about stock prices

A

already reflected all available information

Follow a random walk

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16
Q

Weak Form claims that

A

past price movements and volume do not impact prices

Technical analysis is not beneficial, fundamental analysis can add value

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17
Q

Semi Strong Form claims that

A

all public information is reflected in a stock’s current price

states that neither technical nor fundamental analysis can add value

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18
Q

Strong Form Claims that

A

All public and private information is reflected in a stock’s current price

not even insider information can add value

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19
Q

Implications of EMH

A

Technical analysis - using prices and volume information to predict future prices

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20
Q

Magnitude issue

A

only managers of large portfolios can earn enough trading profits to make the exploitation of minor mispricing worth the effort

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21
Q

Selection bias issue

A

only unsuccessful investment schemes are made public; good schemes remain private

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22
Q

Semi Strong Tests : Anomalies

A

PE Effect

Small Firm Effect

Neglected Firm Effect

Book-to-market ratios

Post earning announcements

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23
Q

CAPM explains what

A

the relationship between risk and expected return

investors should be compensated for both the time value of money and risk taken

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24
Q

CAPM formula

A

Risk free rate + Market risk premium times the beta of the asset

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25
Q

Security market line is a graphical expression of what

A

CAPM

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26
Q

The slope of the SML represents what

A

the market risk premium

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27
Q

SML is measured by what

A

BETA

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28
Q

Arbitrage Pricing Theory

A

seeks to explain security returns beyond the usual metrics by introducing risk factors such as expected return, sector and systematic factors

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29
Q

APT assumptions

A

does not require an expected market return

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30
Q

Arbitrage occurs if there is what

A

zero investment portfolio with a sure profit

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31
Q

APT applies well to

A

well-diversified portfolios not necessarily individual stocks

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32
Q

Fama French Three Factor Model

A

Small minus big

High minus low book-to-market ratios (Value style)

Risk premium

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33
Q

Semi Variance measures

A

dispersion of data that is below the mean or target value of a data set

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34
Q

Semi Variance defined

A

is the average of the all squared deviations of values less than the average or mean

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35
Q

VAR defined

A

measure of risk that quantifies potential loss, the probability of the potential loss and the time frame for the potential loss

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36
Q

VAR assumes what

A

market to market pricing, no trading and normal market conditions

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37
Q

VAR is most frequently associated with

A

extreme negative returns

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38
Q

Expected Shortfall (ES)

A

More conservative measure of downside risk than VAR

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39
Q

VAR takes

A

the highest return from the worst cases

40
Q

ES takes

A

the average return return from the worst cases

41
Q

Kurtosis defined

A

measures the peakedness of a probability distribution or normal distribution curve

42
Q

Positive Kurtosis

A

Leptokurtic

43
Q

Leptokurtis shows

A

more slender distribution, higher peak that is concentrated more around the mean and may have fatter tails

44
Q

Low Kurtosis

A

Platykurtic

45
Q

Platykurtis shows

A

thinner tails and distribution that is less concentrated around the mean, thus a flatter peak

46
Q

What is the equation of Capital Allocation Line with the below assumptions:

T Bill rate of 3.6%
SDEV of portfolio 7.2%
Expected return of portfolio 12%

A

12%-3.6%/7.2% = 1.167

47
Q

If one estimates expected single period returns and standard deviations of available securities, as well as the correlations among them, then one can what

A

calculate SDEV and the expected returns of any portfolio consisting of those securities

48
Q

The capital allocation tangency point represents the

A

optimal portfolio

49
Q

Optimal portfolio is found at the what

A

point of tangency

50
Q

A portfolio with a one day 7% VAR of $2MM mean what

A

has a .07 probability of dropping $2MM in one day

51
Q

Figure that is the maximum real loss that can occur and the probability of that loss is what

A

VAR

52
Q

According to MPT, investors will take on increased risk when

A

If compensated with higher returns

53
Q

In MPT, investors are what type of risk

A

risk averse , so they will need more return to take more risk

54
Q

Using the efficient frontier line to contstruct portfolios requires belief in what

A

strong form of EMH

55
Q

CAPM subscribes to what type of EMH

A

Strong form

56
Q

According to Harry Markowitz, to reduce risk in a portfolio, portfolios should have only

A

systematic risk

57
Q

Systematic risk is the only relevant risk in what

A

MPT

58
Q

The two factor models use in MPT are widely considered to be what

A

Too simple

59
Q

Data that are skewed to the right will have a mean and median that are

A

greater than the mode

60
Q

Which form of EMH rejects inside information

A

strong form

61
Q

What can flucuate in MPT

A

Returns

62
Q

What comparative tool is primarily used in conjunction with MPT

A

SML

63
Q

The bais of black-litterman model is a combination of what

A

CAPM and MVO

64
Q

The efficient frontier line is a set of portfolio that represents what

A

highest expected return for a given level of risk

65
Q

In the financial industry, VaR is commonly used by regulators to what

A

guage the assets needed to cover a loss

66
Q

In the context of MPT, during a market downturn, investors will what

A

rebalance or maintain their balances

67
Q

Arbitrage pricing theory is considered to be not only a multi factor model but also a supply-side model primarily because why

A

Its beta coefficients reflect sensitivity to economic factors

68
Q

SML is most associated with

A

systemic or market risk

69
Q

Skewness, while common, allow investors to estimate what

A

A future data point in relation to the mean. Distributions are used as predictive measures.

70
Q

MPT is a how many factor model

A

two

71
Q

Harry Markowitz and William Sharpe define risk as what

A

volatility

72
Q

The CAPM is based on what form of risk

A

volatility

73
Q

The goal of MVO is to what

A

Maximize return for selected levels of risk

74
Q

One way of avoid purchasing power risk as it relates to systematic risk is to

A

buy TIPS

75
Q

Semi Strong EMH proponents believe what

A

Inefficiencies in the market prices; inside information

76
Q

What are the two core components of MPT

A

Volatility and return

77
Q

Investors wishing to capture current economic data in models should use what

A

APT

78
Q

According to MPT and the role of correlation in the theory, investors should select portfolios that what

A

have low correlations; not necessarily -1

79
Q

The sortino ratio is thought to be better ratio than sharpe for what reason

A

Investors are comfortable with upside risk

80
Q

A leptokurtic distribution usually indicates what

A

large fluctuations occurring in the distribution tails

81
Q

The optimal portfolio has what type of assets

A

risky and risk free

82
Q

The underlying theme of factor investing is that

A

Anomalies exist even in efficient markets

83
Q

Single factor models require

A

that investors time their investments

84
Q

Failure swings can indicate what

A

reversal

85
Q

As momentum slows, the price of the security is a

A

signal of mean reversion

86
Q

The goal of incorporating technical analysis in dynamic asset allocation is to

A

add positions that are outpacing the market

87
Q

In institutional management, dynamic asset allocation returns usually are linked to

A

floating rate

88
Q

Dynamic asset allocation can utilize the principles of both

A

rebalancing and sector rotation

89
Q

The Sortino ratio is thought to be a better ratio than the Sharpe ratio because

A

investors are comfortable with upside risk

90
Q

Extrapolating patterns based on small historical data can be an example of an investor exhibiting which type of bias

A

Recency

91
Q

When gauging the expected returns of securities at given levels of risk, the capital asset pricing model may be used in concert with

A

APT

92
Q

Which investor type would need to be challenged to be introspective in their investment decisions?

A

Followers

93
Q

When individuals are predisposed to making a particular decision in advance of reviewing evidence, this may be due to their:

A

selective decision making

94
Q

The capital asset pricing model (CAPM) attempts to explain the relationship between expected return and risk of an asset. An asset above the security market line (SML) can be considered to be:

A

undervalued

95
Q

Home country bias can lead investors to:

A

miscalculate risk and return in the capital markets

96
Q
A

CIMA (22 decks)

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