APMA flashcards
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32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Portfolio Expected Return
- The probability-weighted average of the returns of the assets in a portfolio, computed as the sum of each asset's weight times its expected return.
- Covariance
- A measure of how two asset returns move together; positive covariance means they tend to rise and fall jointly, negative means they offset.
- Correlation Coefficient
- A standardized measure of co-movement ranging from -1 to +1, equal to covariance divided by the product of the two standard deviations.
- Diversification Benefit
- Risk reduction achieved by combining assets whose returns are less than perfectly positively correlated, lowering portfolio variance below the weighted average.
- Systematic Risk
- Market-wide risk affecting all securities, such as interest rates or recessions, that cannot be eliminated through diversification and is measured by beta.
- Beta
- A measure of an asset's sensitivity to market movements, calculated as the covariance of the asset with the market divided by the market variance.
- Security Market Line
- A graph of the capital asset pricing model plotting expected return against beta; assets plotting above the line offer positive alpha.
- Sharpe Ratio
- A risk-adjusted performance measure equal to the portfolio return minus the risk-free rate, divided by the portfolio's standard deviation.
- Investment Policy Statement
- A written document specifying a portfolio's return and risk objectives, constraints, and guidelines that governs all investment decisions.
- Risk Tolerance
- The combination of an investor's financial ability to bear risk and psychological willingness to accept risk in pursuit of objectives.
- Strategic Asset Allocation
- The long-term target mix of asset classes selected to match an investor's objectives and constraints; it drives most return variability.
- Tactical Asset Allocation
- Short-term, deliberate deviations from strategic target weights intended to exploit expected relative performance across asset classes.
- Rebalancing
- The process of restoring portfolio weights to target levels, triggered by calendar dates or by drift exceeding a preset threshold band.
- RRTTLLU Constraints
- A framework listing investor constraints: Return, Risk, Time horizon, Taxes, Liquidity, Legal, and Unique circumstances.
- Time Horizon
- The period over which an investor's funds are committed; longer horizons generally permit greater risk and less liquidity.
- Active Strategy
- An investment approach using security selection or market timing to outperform a benchmark, typically with higher costs and tracking error.
- Passive Strategy
- An approach that seeks to replicate a benchmark index's returns with low turnover and low cost rather than to beat the market.
- Value Style
- An investing style favoring stocks with low price-to-earnings or price-to-book ratios, viewed as underpriced relative to fundamentals.
- Growth Style
- An investing style favoring companies with high expected earnings growth, often trading at high valuation multiples.
- Momentum Strategy
- A strategy that buys securities with strong recent performance and sells recent underperformers, betting trends persist.
- Top-Down Approach
- An investment process beginning with macroeconomic and asset-class analysis, then narrowing to sectors and finally individual securities.
- Bottom-Up Approach
- An investment process starting with analysis of individual companies and their fundamentals, building the portfolio from security selection upward.
- Style Drift
- The unintended migration of a portfolio's holdings away from its stated investment style, often detected using style box analysis.
- Core-Satellite Approach
- A portfolio structure combining a low-cost passive core holding with smaller active satellite positions intended to add alpha.
- Efficient Frontier
- The set of portfolios offering the highest expected return for each level of risk, or lowest risk for each return.
- Capital Allocation Line
- A line showing risk-return combinations of the risk-free asset and the optimal risky portfolio; its slope equals the Sharpe ratio.
- Time-Weighted Return
- A return that removes the effect of external cash flows, preferred for judging manager skill because it isolates investment performance.
- Money-Weighted Return
- A return that reflects the size and timing of an investor's cash flows, equivalent to the internal rate of return of the portfolio.
- Tracking Error
- The standard deviation of the difference between portfolio and benchmark returns, measuring how closely a portfolio follows its benchmark.
- Information Ratio
- Active return divided by tracking error; it measures the excess return earned per unit of active risk taken.
- Jensen's Alpha
- The difference between a portfolio's actual return and the return predicted by CAPM given its beta; positive alpha indicates outperformance.
- Brinson Attribution
- A method decomposing active return into allocation, selection, and interaction effects by comparing portfolio and benchmark weights and returns.