Chapter 5

Question 1

Alpha

Answer 1

Alpha - The difference between the actual return on a portfolio and its expected return as outlined by the capital asset pricing model.

Question 2

Analysis Effect

Answer 2

Analysis Effect - A component of fixed-income attribution analysis that measures the portfolio manager has the ability to invest in securities that are temporarily undervalued.

Question 3

Asset Allocation

Answer 3

Asset Allocation - The investment decision that involves assigning portfolio weights to each asset. This can be achieved through software programs that minimize risk or through a portfolio manager’s expertise.

Question 4

Attribution Analysis

Answer 4

Attribution Analysis - An evaluation tool that is used by investors to measure the ability of managers to outperform a benchmark portfolio. There are generally two components that can be attributed to managerial skill: asset selection and asset allocation.

Question 5

Benchmark Portfolio

Answer 5

Benchmark Portfolio - A portfolio that has similar securities, similar risk characteristics, and similar return expectations as an invested portfolio. It is used as a comparison performance metric. Also called normal portfolio.

Question 6

Bond Market Line

Answer 6

Bond Market Line - An illustration of the relation between the expected rate of return on a bond portfolio and its duration.

Question 7

Brinson, Hood, and Beebower

Answer 7

Brinson, Hood, and Beebower - Three investment advisers who co-authored a seminal academic paper on attribution analysis.

Question 8

Buy and Hold Strategy

Answer 8

Buy and Hold Strategy - A simple investment strategy in which the investor forms a portfolio and holds onto the securities over the investment horizon. There is no rebalancing of security weights when investors pursue this strategy.

Question 9

Dynamic Asset Allocation

Answer 9

Dynamic Asset Allocation - An investment strategy in which the portfolio weights are constantly being adjusted to reflect changing market conditions and changing asset values.

Question 10

Enterprise Value Multiple

Answer 10

Enterprise Value Multiple - A relative valuation tool defined as the ratio of a firm’s enterprise value over its earnings before interest, taxes, and depreciation.

Question 11

Eugene Fama

Answer 11

Eugene Fama - A Nobel Prize winning economist who developed the efficient markets hypothesis and the Fama Decomposition.

Question 12

Fama Decomposition

Answer 12

Fama Decomposition - An attribution analysis tool that identifies a portfolio manager’s ability to use total risk and market timing to outperform a benchmark portfolio.

Question 13

Harry Markowitz

Answer 13

Harry Markowitz - A Nobel Prize winning economist who developed the efficient frontier and is credited with being the original developer of an optimal portfolio allocation model.

Question 14

Indexing

Answer 14

Indexing - A passive investment strategy in which a portfolio is formed that mimics the performance of an index. Indexing is typically accomplished using mutual funds or exchange traded funds.

Question 15

Jensen’s Alpha

Answer 15

Jensen’s Alpha - An absolute portfolio performance measure defined as the difference between the portfolio’s actual return and its expected return.

Question 16

Net Selectivity

Answer 16

Net Selectivity - A product of the Fama Decomposition in which the ability of a manager to select mis-priced securities is identified.

Question 17

Normal Portfolio

Answer 17

Normal Portfolio - A portfolio that has similar securities, similar risk characteristics, and similar return expectations as an invested portfolio. It is used as a comparison performance metric. Also called benchmark portfolio.

Question 18

Outperformance

Answer 18

Outperformance - When portfolio managers generate returns that exceed the relevant benchmark portfolio.

Question 19

Policy Effect

Answer 19

Policy Effect - A component of fixed-income attribution analysis that measures the return impact of the difference between the duration of the index and the duration of the invested portfolio.

Question 20

Price to Book Value Ratio

Answer 20

Price to Book Value Ratio - A relative valuation tool defined as the ratio of stock price to the firm’s equity book value per share.

Question 21

Price to Cash Flow Ratio

Answer 21

Price to Cash Flow Ratio - A relative valuation tool defined as the ratio of stock price to the firm’s cash flow per share.

Question 22

Price to Earnings Ratio

Answer 22

Price to Earnings Ratio - A relative valuation tool defined as the ratio of stock price to the firm’s earnings per share.

Question 23

Price to Sales Ratio

Answer 23

Price to Sales Ratio - A relative valuation tool defined as the ratio of stock price to the firm’s total revenue per share.

Question 24

Rate Anticipation Effect

Answer 24

Rate Anticipation Effect - A component of fixed-income attribution analysis in which the portfolio manager is evaluated based on the ability to anticipate interest rate movements by changing the duration of the portfolio.

Question 25

Relative Value Analysis

Answer 25

Relative Value Analysis - A performance tool in which a security is compared to a peer group using multiples.

Question 26

Sharpe Ratio

Answer 26

Sharpe Ratio - A relative measure of portfolio performance in which total risk as measured by standard deviation is used to estimate risk-adjusted performance.

Question 27

Tactical Asset Allocation

Answer 27

Tactical Asset Allocation - Changes in a portfolio allocation to capture short-term price movements.

Question 28

Technical Analysis

Answer 28

Technical Analysis - An asset selection tool that uses historical asset prices and volume to make portfolio selection decisions.

Question 29

Trading Effect

Answer 29

Trading Effect - A component of fixed-income attribution analysis in which the efficiency of the portfolio manager in executing trades is evaluated.

Question 30

Treynor Ratio

Answer 30

Treynor Ratio - A relative measure of portfolio performance in which systematic risk as measured by beta is used to estimate risk-adjusted performance.

Question 31

Underperformance

Answer 31

Underperformance - When portfolio managers generate returns that are less than the relevant benchmark portfolio.