Portfolio Management: An Overview Flashcards
[With respect to portfolio management]
What is volatility?
The standard deviation of the continuously compounded returns on the underlying asset.
[Math]
Define “Variance” and state how it is calculated.
Variance: Variance measures the average of the squared differences from the Mean.
To calculate variance, you:
1. Find the mean of the data set.
2. Subtract the mean from each data point to get the deviation from the mean for each point.
3. Square each of these deviations (to make them positive values).
4. Average these squared deviations. 5. This result is the variance.
[Math]
Define “Standard Deviation” and state how it is calculated.
Standard deviation provides a measure of the average distance of each data point from the mean.
Standard deviation is the square root of the variance. By taking the square root, standard deviation converts the units back to the original units of the data, making it easier to interpret in context with the data.
What is a “Diversification Ratio”?
The ratio of the standard deviation of an equally-weighted portfolio to the standard deviation of a randomly-selected security.
What is “Modern Portfolio Theory”?
The analysis of rational portfolio choices based on the efficient use of risk.
What is an “Investment Policy Statement”?
A written planning document that describes a client’s investment objectives and risk tolerance over a relative time horizon, along with the constraints that apply to the client’s portfolio.
What does “Asset Allocation” represent?
The process of determining how investment funds should be distributed among asset classes.
What is “Top-Down Analysis”?
An investment selection approach that begins with the consideration of macroeconomic conditions and then evaluates markets and industries based upon such conditions.
What is a “Bottom-Up Analysis”?
An investment selection approach that focused on company-specific circumstances rather than emphasizing economic cycles or industry analysis.
What are “Defined Contribution Pension Plans”?
Individual accounts to which an employee and typically the employer makes contributions during their working years and expect to draw on the accumulated funds at retirement.
The employee bears the investment and inflation risk of the plan assets.
What are “Defined Benefit Pension Plans”?
Plans in which a company promises to pay a certain annual amount (defined benefit) to the employee during retirement.
The company bears the investment risk of the plan assets.
What is a “Buy-Side Firm”?
An investment management company or other investor that uses the services of brokers or dealers.
(i.e., the client of the sell-side firms)
What is a “Sell-Side Firm”?
A broker/dealer that sells securities and provides independent investment research and recommendations to their clients.
What is “Smart Beta”?
Involves the use of simple, transparent, rules-based strategies as a basis for investment decisions.
What is a “Mutual Fund”?
A co-mingled investment pool in which investors in the fund each have a pro-rata claim on the income and value of the fund.
