Portfolio Management Flashcards
Master portfolio management concepts, risk and return, portfolio planning and construction, behavioral biases, risk management, technical analysis, and the role of fintech in investment management.
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Asset allocation
The process of deciding how to allocate investment funds between asset classes.
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Benchmark
A point of reference or comparison.
often refers to a benchmark portfolio, which is used for comparison.
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Beta
A measure of the sensitivity to movements in the overall market.
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Behavioral finance
A field of finance which considers the psychological aspects which can influence the investment decision making process.
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Bollinger Bands
Technical analysis indicator which uses a moving average plus a higher line (the moving average plus a set number of standard deviations from the average price) and a lower line (moving average minus the same number of standard deviations).
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Candlestick chart
Price chart with a candle indicating the opening and closing price for the interval. The body of the candle is shaded if the opening price was higher than the closing price, and the body is clear if the opening price was lower than the closing price. Vertical lines known as wicks extend from the top and bottom of the candle to indicate the high and the low prices for the interval.
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Capital allocation line
CAL
A graph line describing the expected return and standard deviation of return an investor can achieve by combining the optimal portfolio of risky assets with the risk-free asset.
Markowitz
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Capital asset pricing model
CAPM
An equation describing the expected return on any asset (or portfolio) as a linear function of its beta relative to the market portfolio.
E(r)= rf + β (rm – rf)
Treynor and Sharpe
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Capital market line
CML
The tangent line to the efficient frontier of risky assets, with intercept point equaling the risk-free rate.
The CML is the efficient frontier when a risk-free asset is available for investment.
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Change in polarity principle
Technical analysis- once a support level is breached, it becomes a resistance level, and vice versa.
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Conditional VaR
CVaR
A tail loss measure. The weighted average of all loss outcomes that exceed the VaR.
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Divergence
Technical analysis- when an indicator moves differently than the security being analyzed.
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Double bottoms
Technical analysis- a reversal pattern when the price reaches a low, rebounds, and then sells off back to the first low level.
May predict a change from downtrend to uptrend.
Forms a W
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Double top
Technical analysis- a reversal pattern when an uptrend reverses twice at roughly the same high price level.
May predict a change from an uptrend to a downtrend.
Forms an M
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Bullish Crossover
aka golden cross
Technical analysis- when short term moving average cross above a longer term moving average.
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Global minimum-variance portfolio
aka minimum variance portfolio
The combination of assets on the minimum-variance frontier with the smallest variance of return. This doesn’t necessarily have the highest return, but does have lowest variance.
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Head and shoulders pattern
Technical analysis- a reversal pattern that is formed in three parts: a left shoulder, head, and right shoulder.
May predict a change from an uptrend to a downtrend.
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Investment policy statement
IPS
A formal document that outlines an individual’s or an organization’s investment objectives, risk tolerance, guidelines, and strategies.
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Look-ahead bias
When information that was not available or known at the time of an analysis is included in the analysis, potentially leading to overly optimistic or misleading results.
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Loss aversion
People tend to dislike losses more than they like similar sized gains.
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Markowitz efficient frontier
Graph of the set of portfolios which offer the maximum expected return per level of risk (standard deviation of return).
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Mean–variance analysis
Used to evaluate and compare different portfolios (considering means, variances, and covariances) with the purpose of identifying the portfolio that maximizes expected return for a given level of risk or minimizes risk for a given level of expected return.
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Minimum-variance portfolio
Portfolio with the minimum variance for each expected return.
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Modern portfolio theory
MPT
Investment decisions should be analyzed and made based on the belief that investors are risk-averse and seek to maximize returns while minimizing risk
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Moving average
The average of a security’s closing price over a specified number of periods. With each new period, the average is recalculated.
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Moving-average convergence/divergence oscillator
(MACD) A momentum oscillator based on the difference between short-term and long-term moving averages of a security’s price.
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Pennants
Technical analysis- continuation pattern when trendlines converge to form a triangle, typically over a short period.
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Performance appraisal
The evaluation of invesment skill, based on risk-adjusted performance.
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Portfolio planning
Developing a plan for building a portfolio which is aligned with a client’s investment policy statement.
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Relative strength index
Technical analysis- momentum oscillator comparing a security’s gains with its losses over a period.
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Rebalancing policy
Set of rules governing the process of buying and selling assets in order to restore the asset class weights to those specified in the strategic asset allocation.
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Resistance
Technical analysis- a price range in which selling activity is sufficient to stop the rise in the price of a security.
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Retracement
Technical analysis- a reversal or pullback in the price of a financial asset or security from its recent trend.
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Risk aversion
How unwilling someone is to take risk. Often results in prioritizing the avoidance of risk.
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Risk budgeting
The establishment of objectives based upon the determined acceptable levels of risk.
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Risk tolerance
The amount of risk an investor is willing and able to bear.
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Screening
Using criteria to remove potential investments from consideration in order to reduce the number requiring a more robust analysis.
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Security market line
SML
A graphical representation of the CAPM with beta on the x-axis and expected return on the y-axis.
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Separately managed account
SMA
An investment portfolio managed on behalf of an individual or institution, separate from assets of any other investors.
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Strategic asset allocation
The set of exposures to different asset classes, based on the IPS, which is expected to achieve the client’s long-term objectives.
Longer term intended weights/exposures.
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Support
Technical analysis- a price range in which buying activity is strong enough to stop the decline in the price.
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Survivorship bias
When the analysis fails to account for individuals or companies which have not survived (or are no longer in a database). The data is therefore incomplete or skewed.
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Tactical asset allocation
Deliberate choice to deviate from the strategic asset allocation to add value by capitalizing on short term trends and projections.
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Technical analysis
A method of evaluating securities by analyzing historical price and volume data, as well as various chart patterns and technical indicators, with the goal of making predictions about future price movements
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Top-down analysis
Beginning the investment process with an analysis of macroeconomic trends and then selecting the most attractive investments within those segments.
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Tracking error
The standard deviation of the differences between a portfolio’s returns and its benchmark’s returns
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Treynor ratio
Measure of risk-adjusted performance which relates a portfolio’s excess returns to the portfolio’s beta.
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Triple bottoms
Technical analysis- a reversal pattern when the price forms three troughs at roughly the same price level.
May predict a change from a downtrend to an uptrend.
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Triple tops
Technical analysis- reversal pattern when the price forms three peaks at roughly the same price level.
May predict a change from an uptrend to a downtrend.
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Value at risk
VaR
Statistical measure used to estimate the potential loss over a specific time horizon under normal market conditions, with a specified level of confidence.
It quantifies the maximum loss an investment portfolio would be expected to experience over a given time period at a certain level of probability.
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Anchoring and Adjustment Bias
Cognitive bias where one becomes overly committed to initial information or overly wary of new information and therefore fails to objectively assess probabilities.
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Artificial Intelligence
Computers with cognitive and decision making ability.
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Availability bias
Cognitive bias where probabilities are estimated based on how easily outcomes come to mind.
Outcomes that are easiest to think of are believed to be most likely.
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Backfill bias
When researchers or analysts inadvertently include or “backfill” historical data on certain assets or strategies that were not part of their original dataset or analysis at the time (ex adding hedgefunds to an index or dataset only after returns have been reported).
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Base rate neglect
Cognitive bias, and a type of representativeness bias, in which the base rate (prior probabilities) is not given enough consideration. Occurs when people place too much emphasis on specific, vivid, or anecdotal information, even when it is less relevant or less reliable than prior probabilities.
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Bearish crossover
Technical analysis- when a short term moving average moves down and crosses a longer term moving average.
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Big Data
Extensive data from both traditional and non traditional data sources.
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Breakdowns and Breakouts
When the price either falls below support or moves above resistance (respectively).
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CBOE Volatility Index
VIX
Measure of expected volatility in the S&P 500 over the proceeding 30 days, based upon S&P 500 index option prices.
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Cognitive dissonance
When one experiences discomfort due to learning new information which conflicts with prior beliefs.
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Cognitive errors
Bias due to poor reasoning. May be due to poor statistical skills, information processing, or flawed memory.
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Confirmation bias
Belief perseverance bias- only information confirming one’s original beliefs is adequately considered. Other information is underweighted or disregarded.
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Conservatism bias
belief perseverance bias- tendency to be overly cautious or resistant to change, and therfore cling to prior view even though new information should be considered and/or incorporated.
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Cryptocurrency
Electronic medium of exchange which operates on decentralized networks based on blockchain technology and cryptography.
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Cryptography
The art of using code in order to protect who information is shared with. In computer science this is applied with an agorithmic process in order to enrypt data so that unauthorized parties cannot access/use it.
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Deep learning
Subset of machine learning which uses neural networks to recognize patterns and make connections in order to learn and perform complex tasks.
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Distriguted Ledger
Database which can be shared within the network.
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Distributed Ledger Technology
Technology which operates via use of a distributed ledger.
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Disposition effect
Emotional bias which causes investors to behave irrationally and dispose of winning investments prematurely or hold losing investments longer than they should. This is related to loss aversion and a desire not to realize losses.
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Emotional bias
Behavioral biases where one does not behave most rationally because theyare influenced by their emotions.
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Endowment bias
When an investor attributes greater value to asset purely based on the fact that they already own it.
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Expected return on the portfolio
Weighted average of expected returns on constituent securities.
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Framing bias
When an individual answers a question differently based on how the question is asked (framed).
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Groupthink
When a group demonstrates irrational or suboptimal decision making, often negleting opposing viewpoints, due to a desire to conform or avoid confrontation
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Halo effect
Looking favorably upon someone or something based upon one favourable trait or impression.
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High frequency trading
HFT
Algorithmic trading which uses data and access to ultra-high-speed networks to execute many trades at extremely high speeds.
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Hindsight bias
Bias in which the past is inaccurately remembered. Often results in viewing the past as having been easy to predict or only recalling certain aspects of the past.
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Home bias
Preference to invest in securities listed in one’s home country.
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Illusion of control bias
Naive belief that one can influence or control outcomes.
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Initial coin offering
ICO
Unregulated process when companies raise capital by selling cryptocurrency tokens.
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Internet of Things
IoT
Network of structures and devices which allows for devices on the network to interact and share data.
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Liability Driven Investment
LDI
Investment approach which considers the size, timing, and uncertainty of future obligations in order to determine how to invest so that the assets will be able to meet the obligations.
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Machine learning
Technique where a computer learns from known examples and generates structures or predictions which can be applied to large data sets using algorithms.
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Mental accounting bias
When an individual treats a sum of money differently based on which mental account they have assigned the money to.
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Natural language processing
Computer programs which analyze and interpret human language.
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Network effect
As the number of users using the network increases it increases the value/utility of the network.
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Neural networks
Computer programs used in deep learning which mimic how the brain learns and processes info. Neural networks consist of interconnected nodes, or “neurons,” organized into layers. These interconnected neurons allow the network to learn and generalize from large datasets
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Overconfidence bias
Having unwarranted faith in own reasoning, judgement, or cognitive abilities.
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Permissionless networks
DLT networks which are fully open to any user.
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Regret-aversion bias
Emotional bias when people avoid making decisions because they worry the result will be negative and they experience regret.
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Representativeness bias
Tendency to rely on how closely an object, person, or event matches one’s perception of a category rather than evaluating objective statistical information/probabilities.
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Robo-adviser
Machine based analytical tool which provides investment solutions through online platforms.
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Sample size neglect
Type of representativeness bias- when one assumes that an inadequately sized sample is representative of the population.
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Self-attribution bias
Bias where a person takes too much credit for successes and not enough responsibility for failings.
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Self-control bias
Bias where a person fails to act in a way that aligns with their long term goals due to lack of self discipline.
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Smart contract
Computer program that self-executes based on pre-specified terms and conditions agreed upon by the parties involved.
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Status quo bias
Emotional bias where one chooses to do nothing instead of making a change.
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Stochastic oscillator
Momentum indicator which compares a particular closing price to a range of the security’s closing prices over a period of time.
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Supervised learning
Machine learning approach which uses labeled training data.
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Text analytics
Use of computer programs to analyze and derive meaning from typically large, unstructured text or voice based datasets.
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Tokenization
Use of blockchain or DLT to represent ownership rights of a physical asset.
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Unsupervised learning
Machine learning which does not use labeled training data.
