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