module 1: investment risk and return analysis

what are the 3 standard deviations of a bell curve

1 deviation = 68% 2 deviations = 95% 3 deviations = 99%

downshift keys 1. mean 2. standard deviation

1. 7 2. 8w

For purposes of diversification, you want R^2 to be *higher/lower*

lower

To diversify your portfolio, you should choose a fund the the *highest/lowest* correlation coefficient

lowest

4 smart beta strategies

1. attempt to capture a systematic risk premium 2. utilizes rules that rely on characteristics (small capitalization) 3. have portfolio weights that differ from market cap weights 4. maintaining broad portfolios

types of unsystematic risk (8)

1. business risk 2. credit risk 3. default risk 4. event risk 5. liquidity risk 6. marketability risk 7. tax risk 8. political risk

3 terms that deal with correlation

1. covariance 2. correlation coefficient 3. coefficient of determination

2 things to know about correlations

1. they are constantly changing 2. they are inconsistent in rising and falling markets

A coefficient of determination of _% or higher means it is not an effective diversifier

70

types of systematic risk (5)

PRIME 1. purchasing power 2. reinvestment rate risk 3. interest rate risk 4. market risk 5. exchange rate risk

correlation coefficient is known as _ coefficient of determination is known as _

R R^2

_ is a measure of systematic risk

beta

_ tells us how volatile an asset is compared to another, typically an index benchmark a beta of 1 or higher indicates a stock's volatility and risk is higher than the market

beta

_ indicates the % of one's asset's movement that can be explained by the movement of a second asset the second asset is usually a _

coefficient of determination (r^2) market index

_ is the measure of a security's risk adjusted return the lower the number, the higher return per unit of risk

coefficient of variation

_ shows risk per unit of return It captures both _ and _

coefficient of variation standard deviation expected return

_ measures the strength of the relationship of returns between 2 assets the lower the number the lower the risk compared to other investment in portfolio

correlation coefficient

_ has the greatest impact on standard deviation in a 2 asset portfolio.

covariance

_ measures the extent to which two variables (such as 2 stocks) are related to each other, usually focused on price movements

covariance

When interest rates go up, bond prices _

decrease

_ is structuring a portfolio to minimize risk and maximize return

diversification

_ is related to the amount of risk of a company's debt.

financial

For beta to be reliable we need a high amount of systematic risk, so you want R^2 to be *lower/higher*

higher higher than .7

Coefficient variation is used for _

investment comparison

A fund has a correlation coefficient of .8. How much of the price movement of the fund can be explained by the S&P 500?

just square the .8

A distribution that has a greater % of small deviations from the mean and a greater % of extremely large deviations from the mean will be....

leptokurtic and exhibit positive excess kurtosis

_ occurs when there are a lot of returns clustered around the mean return with few large surprises

leptokurtic kurtosis

real estate is subject to which 2 risk

liquidity marketability

When seeking out an investment with the least amount of risk, you want the investment with the _ beta.

lowest

_ is used to develop an optimistic, pessimistic, and most probable outcome for a base scenario

modeling

Can the weighted average approach calculate portfolio standard deviation?

no can calculate return and beta though

Reading correlation coefficient results: range of +1 to 0 = range of 0 to -1 =

positive linear relationship, with 1 being perfect and 0 meaning no relationship negative linear relationship, with 1 being perfect and 0 meaning no relationship

Generally, investment returns are _ skewed

positively

_ measures only the returns that fall below the average and is primarily used by portfolio managers. This measure recognizes that investors are concerned less about upside potential and more about downside risk

semi variance

_ analysis is used to evaluate the risk associated with a given investment and assesses the impact of different variables (such as business cycle) on an investments return usually uses NPV and IRR

sensitivity analysis

_ strategies are a combination of active management and indexing that uses portfolio weight rules that differ from market cap weights in an attempt to deliver improved risk and returns

smart beta

Coefficient variation formula:

standard deviation / mean return you want the lowest number

_ modeling is a method of financial analysis that attempts to forecast how investment returns on different asset classes vary over time by using thousands of simulations to produce probability distributions for various outcomes

stochastic

2 types of risk

systematic and unsystematic

if you are seeking the least amount of risk you want which beta coefficient?

the one with the lowest number

* beta is x and the standard deviation is almost twice that of the market. What causes this?

the stock has a low correlation to the benchmark being used

What is the purpose of portfolio management?

to match appropriate investment vehicles to your client's goals and time horizon while simultaneously considering your client's risk tolerance

* Risk adjusted return for Beta

total return / beta

Standard deviation is a measure of _ risk, which is comprised of _ & _

total risk systematic and unsystematic