SS 12: Portfolio Management Flashcards Preview

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Flashcards in SS 12: Portfolio Management Deck (31)
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1
Q

____ is the most important measure of risk and measure the sensitivity of the derivatives’ price to small changes in the value of the underlying asset.

A

Delta

2
Q

Financial Leverage =

A

ROE
/
ROA

3
Q

___ will measure the impact of changes in volatility of the underlying asset on the derivative.

A

Vega

4
Q

Correlation coefficient =

A
Covariance(xy)
/
Standard deviation(x) * standard deviation(y)
5
Q

If an individual specifies they have a high level of risk tolerance and seek long-term wealth accumulation what investment goal would they most likely have?

A

Capital appreciation

6
Q

SML stands for:

A

Security Market Line

7
Q

Regarding the concept of mean-variance theory, the optimal portfolio is determined by each unique investor’s:

A

Risk preference

8
Q

ETFs have (higher/lower) expenses than mutual funds

A

Lower

9
Q

An investor’s optimal portfolio is where his highest utility curve is:

A

At a tangent to the efficient frontier

10
Q

Covariance of a security’s returns with the market return
/
Variance of market returns
=

A

Beta of a security

11
Q

The index weighting that results in portfolio weights shifting away from securities that have increased in relative value toward securities that have fallen in relative value whenever the portfolio is rebalanced is most accurately described as:

A

fundamental weighting

Fundamentally weighted indices generally will have a contrarian “effect” in that the portfolio weights will shift away from securities that have increased in relative value and toward securities that have fallen in relative value whenever the portfolio is rebalanced.

12
Q

Name 8 hedge fund strategies:

A
  1. Convertible arbitrage
  2. Dedicated short bias
  3. Emerging markets
  4. Equity market neutral
  5. Event driven
  6. Fixed-income arbitrage
  7. Global macro
  8. Long/short
13
Q

‘An estimate of MINIMUM loss from a trading position over a fixed time horizon that would be expected with a specified probability’ is a definition of:

A

Value at risk (VaR)

14
Q

The covariance between a risk-free asset and the market portfolio is:

A

0

15
Q

‘The people, processes and technology in place to track risk exposure of the organisation’ is a definition of:

A

Risk infrastructure

16
Q

Regarding endowments,

Time horizon is:

Risk tolerance is:

Liquidity needs are:

A

Time horizon is typically very long term

Risk tolerance is typically quite high

Liquidity needs are typically quite low

17
Q

IPS stands for:

A

Investment Policy Statement

18
Q

Diversification ratio:

A

A portfolio’s standard deviation of returns / the average standard deviation of returns of the individual securities int he portfolio

19
Q

To capture large changes in the value of the underlying, _____ is used. This is a second-order risk because it reflects the risk of changes in the delta.

A

Gamma

20
Q

The risk that arises when it becomes difficult to sell a security in a highly stressed market is called:

A

Liquidity risk

21
Q

The risk-free rate is where the SML intersects:

A

The Y-axis

22
Q

List 8 assumptions of Capital Market Theory

A
  1. All investors are efficient
  2. Investors borrow/lend money at the risk-free rate
  3. The time horizon is equal for all investors
  4. All assets are infinitely divisible
  5. No taxes and transaction costs
  6. All investors have the same probability for Outcomes
  7. No inflation exists
  8. There is no mispricing within the capital markets
23
Q

The slope of the SML is:

A

The market price of risk

24
Q

Tail risk is:

A

the risk that results from using inappropriate modeling assumptions such as assuming that returns are normally distributed

25
Q

Model risk is:

A

the risk of using the wrong model to analyze an investment or the risk of using the right model for the analysis but using it incorrectly

26
Q

‘Where exposure to a counterparty is positively related to the counterparty’s credit risk’

best describes:

A

Wrong-way risk

27
Q

Portfolios representing combinations of the risk-free asset and the market portfolio are plotted on the:

A

Capital market line

28
Q

STEPS IN THE PORTFOLIO MANAGEMENT PROCESS

A

The Planning Step

  • Understanding the client’s needs
  • Preparation of an investment policy statement (IPS)

The Execution Step

  • Asset allocation
  • Security analysis
  • Portfolio construction

The Feedback Step

  • Portfolio monitoring and rebalancing
  • Performance measurement and reporting
29
Q

__ will measure the impact of a change in interest rates on the value of the derivative.

A

Rho

30
Q

The line that represents possible combinations of a risky asset and the risk-free asset is referred to as:

A

The capital allocation line (CAL)

31
Q

With regards to the inflation premium,

Nominal risk-free rate:

Real risk-free rate:

A

Nominal risk-free rate: Ignore inflation premium

Real risk-free rate: Add inflation premium