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Investments > Determining the Optimal Portfolio > Flashcards

Determining the Optimal Portfolio Flashcards

1
Q

what is the simplest way to control risk in the portfolio

A

change the fraction invested in risk free assets versus the fraction invested in risky assets

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2
Q

where does the capital allocation line meet the efficient frontier

A

the tangency point

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3
Q

the tangency point gives us what type of slope for the CAL

A

highest possible slope

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4
Q

the tangency point is what point on the efficient frontier

A

the highest possible return to risk ratio

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5
Q

what 3 factors should determine the optimal portfolio for an investor

A
  1. The efficient frontier of all risky assets
  2. The Capital Allocation Line
  3. Investor’s indifference curves
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6
Q

what can the slope of the indifference curve tell us

A

about risk aversion

with more risk, a person would want more return

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7
Q

which is the optimal portfolio in relation to where CAL and indifference curves intersect

A

highest possible indifference curve that intersects with the CAL

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8
Q

does everyone have the same optimal portfolio

A

no because everyone has different expectations

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9
Q

Features of an Investment Policy Statement

A
  1. Risk Objectives
  2. Return Objectives
  3. Liquidity Objectives
  4. Time Horizon Objectives
  5. Tax Concerns
  6. Legal and Regulatory Factors
  7. Unique Conditions
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10
Q

what is absolute risk aversion

A

no loss of capital

or lose no more than a certian % of cpaital

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11
Q

how is capital at risk stated

A

in probability terms - VALUE AT RISK

eg 95% probability of a loss no more than 13% in a 12 month period

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12
Q

what is a relative risk objective

A

relate risk to a benchmark eg s&p or LIBOR

or in realtion to a liabilty

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13
Q

what is an example of risk relative to a liability

A

trying to meet pension payments as they come due

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14
Q

two types of risk objectives

A

relative
absolute

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15
Q

what two things impact risk tolerance

A

willingness to take risk
ability to bear risk

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16
Q

what affects willingness to take risk

A

personality type
confidence
independent thinking

17
Q

what affects ability to bear risk

A

time horizon
expected income
wealth relative to liabilities

18
Q

what are the two types of return objectives

A

absolute
relative

19
Q

two types of absolute return objectives

A

nominal and real

20
Q

what are relative return objectives

A

claim to outperform the benchmark, or other portfolio managers

21
Q

why does being realistic come into account when considering return objective

A

given the risk you are taking, you have to be realistic with return objectives

22
Q

investors usually want to be told what type of return rate when investing

A

real rate

know the numbers

23
Q

fund managers usually give what type of return objectives

A

relative

24
Q

why do fund managers have to consider liquidity

A

will withdrawls ve needed at short notice

25
Q

example of a fund where liquidity needs are more predictable

A

pension

26
Q

what is one of the least liquid assets

A

real estate

you cannot sell overnight
transaction costs needed to turn real estate into cash

27
Q

what type of funds are less predictible in terms of liquidity

A

insurance companies

claim need to be paid - how much to keep in liquid assets

28
Q

what do we need to consider when it comes to time horizon objectives

A

when will the funds be withdrawn

29
Q

what taxes might the investor consider

A

income tax
capital gains tax
pension funds are tax exempt

30
Q

examples of legal and regulatory factors they might need to consider

A

insider trading is illegal

restrictions on short sales

restriction in some countries of amount of assets held overseas

restriction in quality of assets (no junk assets)

31
Q

examples of unique conditions that may effect investment decision

A

ehtical values eg no child labour
religion eg no gambling
person preferences eg environmental sustainability

32
Q

does a longer time horizon mean more or less ability to bear risk

A

more

more time to recover

33
Q

what should a person avoid investing in to diversify

A

their own industry that they work in

home market

Investments (19 decks)

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