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.