Portfolio Risk and Return: Part 2 Flashcards
What does “Homogeneity of Expectations” refer to?
The assumption that all investors have the same economic expectations and thus have the same expectations of prices, cash flows, and other investment characteristics.
What is an “Informationally-Efficient Market’?
A market in which asset prices reflect new information quickly and rationally.
What is “Short Selling”?
A transaction in which borrowed securities are sold with the intention to repurchase them at a lower price at a later date and return them to the lender.
What is the “Capital Market Line”?
The line with an intercept point equal to the risk-free rate that is tangent to the efficient frontier of risky assets; represents the efficient frontier when a risk-free asset is available for investment.
What is “Systematic Risk”?
The risk that affects the entire market or economy; it cannot be avoided and is inherent to the overall market; Also known as non-diversifiable market risk.
What is “Non-systematic Risk”?
Unique risk that is local or limited to a particular asset or industry that need not affect assets outside of that asset class.
What is a “Return-Generating Model”?
A model that can provide an estimate of the expected return of a security given certain parameters and estimates of the values of independent variables in the model.
What is a “Multi-Factor Model”?
A model that explains a variable in terms of the values of a set of factors.
What is a “Market Model”?
A regression model with the return on a stock as the dependent variable and the returns of a market index as an independent variable.
What does “Beta” refer to?
A measure of the sensitivity of a given investment or portfolio to movements in the overall market.
What is the “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.
What is “Performance Evaluation”?
The measurement and assessment of the outcomes of investment management decisions.
What is the “Sharpe Ratio”?
The average return in excess of the risk-free rate divided by the standard deviation of the return.
What is the “Treynor Ratio”?
A measure of risk-adjusted performance that relates a portfolio’s excess returns to the portfolio’s beta.
What is M2?
A measure of what a portfolio would have returned if it had taken on the same total risk as the market index.
