Modern Portfolio Concepts Flashcards
Ch 5 (22 cards)
What is beta?
A measure of undiversifiable, or market, risk that indicates how the price of a security responds to market forces.
Chapter 5
What does the capital asset pricing model (CAPM) link?
It links the notions of risk and return using beta, the risk-free rate, and the market return.
Chapter 5
Define correlation.
A statistical measure of the relationship between series of numbers representing data of any kind.
Chapter 5
What is a correlation coefficient?
A measure of the degree of correlation between two series.
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What is diversifiable (unsystematic) risk?
The portion of an investment’s risk that results from uncontrollable or random events that are firm-specific; can be eliminated through diversification.
Chapter 5
What is the efficient frontier?
The leftmost boundary of the feasible set of portfolios that includes all efficient portfolios—those providing the best tradeoff between risk and return.
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Define an efficient portfolio.
A portfolio that provides the highest return for a given level of risk.
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What is firm-specific risk also known as?
Unique risk or idiosyncratic risk.
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What characterizes a growth-oriented portfolio?
Its primary objective is long-term price appreciation.
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What is the goal of an income-oriented portfolio?
To produce regular dividends and interest payments.
Chapter 5
Define market risk.
Risk of decline in investment returns because of market factors independent of the given investment.
Chapters 4 and 5
What does modern portfolio theory (MPT) focus on?
It uses several basic statistical measures to develop a portfolio plan.
Chapter 5
What does negatively correlated mean?
Describes two series that move in opposite directions.
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What is perfectly negatively correlated?
Describes two negatively correlated series that have a correlation coefficient of –1.
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Define perfectly positively correlated.
Describes two positively correlated series that have a correlation coefficient of 1.
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What is portfolio beta (bp)?
The beta of a portfolio; calculated as the weighted average of the betas of the individual assets it includes.
Chapter 5
What does positively correlated mean?
Describes two series that move in the same direction.
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What is the security market line (SML)?
The graphical depiction of the capital asset pricing model; reflects the investor’s required return for each level of undiversifiable risk.
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Define total risk.
The sum of an investment’s undiversifiable risk and diversifiable risk.
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What characterizes traditional portfolio management?
It emphasizes balancing the portfolio by assembling a variety of stocks and/or bonds from a broad range of industries.
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What does uncorrelated mean?
Describes two series that lack any relationship or interaction, having a correlation coefficient close to zero.
Chapter 5
Define undiversifiable (systematic) risk.
The risk that remains even in a well-diversified portfolio; affects all (or nearly all) securities.
Chapter 5
