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What is the main goal of Growth-Orientated Portfolios?
Long-Term Price Appreciation
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What is an Income-Orientated Portfolio?
Designed to produce regular dividends and interest payments.
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What are Portfolio Objectives?
- Ultimate Goal: Efficient Portfolio - provides the highest return for a given level of risk.
- Aren't necessarily easy to identify.
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Standard Deviation(Single Asset):
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What is Correlation?
- Statistical measure of the relationship between 2 series of numbers.
- If 2 series move in the same direction, they have a positive correlation.
- If 2 series move in opposite directions, they have a negative correlation.
- If 2 series have no relationship at all, they are uncorrelated.
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What is the Correlation Coefficient of Perfectly Correlated series? Perfectly Negative?
+1, -1
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From an investor's perspective, what is the relevant risk?
Inescapable Risk.
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What are the Components of Risk?
- Diversifiable Risk(unsystematic)-results from uncontrollable or random events that are firm-specific. Portion of risk that can be eliminated through diversification.
- Nondiversifiable(systematic)-inescable portion of an investment's risk.General forces: war, inflation, political events.
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What is the Total Risk?
Systematic + Unsystematic
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What is Beta?
- Number that measures market, systematic, risk.
- Indicates how the price of a security responds to market forces.
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Deriving Beta:
Plot on x-axis the %Market Return. Plont on y-axis the %Security Return. Find slope for individual securities to get beta.
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Security Market Line(SML)
Graphical depiction of CAPM.
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What is Traditional Portfolio Management?
- Emphasizes balancing portfolio by assembling a wide variety of stocks/bonds.
- Particularly interindustry diversification.
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What is Modern Portfolio Theory?
- Utilizes several basic statistical measures to develop a portfolio plan.
- Included: Expected Returns, Standard Deviations, Correlation between each rates of returns.
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What is the Efficient Frontier?
- All efficient portfolios, those that provide the best tradeoff between risk and return.
- All portfolios on the efficient frontier are preferrable to all other portfolios in the feasible set.
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What is the Market Beta?
- 1.
- Those portfolios that are higher than 1 are riskier than the market.
- Those that are less than 1 are less riskier than the market.
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