Chapter 5

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  1. What is the main goal of Growth-Orientated Portfolios?
    Long-Term Price Appreciation
  2. What is an Income-Orientated Portfolio?
    Designed to produce regular dividends and interest payments.
  3. What are Portfolio Objectives?
    • Ultimate Goal: Efficient Portfolio - provides the highest return for a given level of risk.
    • Aren't necessarily easy to identify.
  4. Portfolio Return:
    Image Upload 1
  5. Variance:
    Image Upload 2
  6. Standard Deviation(Single Asset):
    Image Upload 3
  7. 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.
  8. What is the Correlation Coefficient of Perfectly Correlated series? Perfectly Negative?
    +1, -1
  9. From an investor's perspective, what is the relevant risk?
    Inescapable Risk.
  10. 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.
  11. What is the Total Risk?
    Systematic + Unsystematic
  12. What is Beta?
    • Number that measures market, systematic, risk.
    • Indicates how the price of a security responds to market forces.
  13. Deriving Beta:
    Plot on x-axis the %Market Return. Plont on y-axis the %Security Return. Find slope for individual securities to get beta.
  14. CAPM:
    Image Upload 4
  15. Security Market Line(SML)
    Graphical depiction of CAPM.
  16. What is Traditional Portfolio Management?
    • Emphasizes balancing portfolio by assembling a wide variety of stocks/bonds.
    • Particularly interindustry diversification.
  17. 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.
  18. 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.
  19. Portfolio Beta:
    Image Upload 5
  20. 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.
Card Set:
Chapter 5
2012-09-23 22:56:17
FIN 310

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