Portfolio Management I Flashcards Preview

CFA 1 > Portfolio Management I > Flashcards

Flashcards in Portfolio Management I Deck (33):
1

Covariance formula

Sum[(Xr - Xbar)*(Yr-Ybar)] / N-1

2

Capital allocation line

(1) Combining risk free asset with risky asset
(2) Correlation is 0, volatility is reduced
(3) Line runs from risk free asset to optimal portfolio

3

Capital allocation line optimal portfolio

Where indifference curve and capital allocation line meets

4

CAPM assumption expectations

Investors have homogenous expectations, meaning same estimates of risk, return and correlations.

5

CAPM Market Line Formula

E(Rp) = RFR + (E(Rm) - RFR) * (stdev portfolio / stdev market)

6

CAPM Theory

Security returns depend on SYSTEMATIC risk, because diversification is free so no benefit from unsystematic risk

7

Beta definition

Sensitivity of asset return to the market

8

Beta formula

COVAR(asset return, market return) / Var(market return)

9

Security Market Line (SML) formula

SML = E(Ri) = RFR + Beta * [E(Rmkt) - RFR)]

10

Security Market Line meaning

Expected return is risk free rate + beta adjusted market premium.

11

CAPM and discount rates

Can use the CAPM / SML rate to get the discount rate for a project given its beta

12

Security Market Line (buy/sell)

All correctly priced assets should be on the SML. If expected > required, buy. Etc.

13

Jensen's Alpha

(1) % return in excess from portfolio with same beta but on the SML
(2) (return of portfolio - RFR) - Beta*(Return on market - RFR)

14

Investment Constraints (RRTTLLU)

Risk, Return, Time Horizon, Taxes, Liquidity, Legal Restrictions and Unique Characteristics

15

Dealers / Brokers

Dealers facilitate trades through their own inventory

Brokers act as agent

16

Leverage Ratio

value of asset / value of equity position

17

Maintenance Margin

Typically 25% of position

18

Margin call price formula

Initial purchase price * [(1-initial margin) / (1-maintenance margin)]

19

Underwritten offer

Bank agrees to purchase entire issue at negotiated price

20

Best efforts

Bank is not obligated to buy remaining shares.

21

Shelf registration

Firm makes public disclosures as in regular offering, but sells over time as needed

22

Price weighted indices

(1) Higher priced stocks have a greater weight

23

Equal-weighted indices

(1) each security has the same weighting
(2) transaction costs from rebalancing can be high

24

Market capitalization weighted indices

(1) more accurately reflect changes in investor wealth
(2) Do not need to be adjusted for splits or stock dividends

25

Fundamental weighted indices

(1) avoids overvalue bias present in other indices
(2) will naturally have a value bias

26

Weak form market efficiency

(1) Prices fully reflect all available data.
(2) Based data has no predictive power
(3) Technical analysis doesn't work

27

Semi-strong form market efficiency

(1) Prices rapidly adjust without bias.
(2) Prices fully reflect all publicly available info
(3) Fundamental analysis does not work

28

Strong form

(1) Prices fully reflect all information (public and private)
(2) No one can beat the market

29

Loss aversion

More risk averse when faced with losses than gains

30

Representativeness

Assuming a good company is a good investment

31

Gambler's fallacy

Recent results affect estimates of future outcomes

32

Conservatism

Reacting slow to changes

33

Disposition effect

Willing to realize gains but not losses