What is the main goal of Growth-Orientated Portfolios?
Long-Term Price Appreciation
What is an Income-Orientated Portfolio?
Designed to produce regular dividends and interest payments.
What are Portfolio Objectives?
Ultimate Goal: Efficient Portfolio - provides the highest return for a given level of risk.
Aren't necessarily easy to identify.
Portfolio Return:
Variance:
Standard Deviation(Single Asset):
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.
What is the Correlation Coefficient of Perfectly Correlated series? Perfectly Negative?
+1, -1
From an investor's perspective, what is the relevant risk?
Inescapable Risk.
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.
What is the Total Risk?
Systematic + Unsystematic
What is Beta?
Number that measures market, systematic, risk.
Indicates how the price of a security responds to market forces.
Deriving Beta:
Plot on x-axis the %Market Return. Plont on y-axis the %Security Return. Find slope for individual securities to get beta.
CAPM:
Security Market Line(SML)
Graphical depiction of CAPM.
What is Traditional Portfolio Management?
Emphasizes balancing portfolio by assembling a wide variety of stocks/bonds.
Particularly interindustry diversification.
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.
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.
Portfolio Beta:
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.