# 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.