Question by: Claudia Leone | Last updated: January 2, 2022
Indifference curves can be infinite: in the same time span each investor has his own indifference curve; and the same investor may have indifference curves that change over time based on any change in their preferences.
Which indicator graphically expresses the inclination of the security market line?
Graphically, Jensen’s alpha is equal to the vertical deviation between the line representing the portfolio being considered and the SML.
How is the benefit of diversification calculated?
(Weighted Average Volatility – True Portfolio Risk / Weighted Average Volatility x 100. In the example (7.86-6.29) / 7.86 X100 = 20% BENEFIT OF DIVERSIFICATION (I HAVE SAVED A 20% RISK) .
What is the efficient frontier of a portfolio?
The efficient frontier is made up of portfolios placed along a curve (i.e. the frontier), which for a given return have less risk and for a given degree of risk have greater returns.
What is meant by portfolio theory?
Markowitz argued that building a portfolio requires identifying stocks whose combination minimizes risk and maximizes return; to do this he was the first to introduce the concept of correlation between titles. …
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What does the Sharpe index show?
The Sharpe index (named after the economist who introduced this measure) is an indicator that measures the excess return, compared to the risk-free rate, achieved by a portfolio (or fund) per unit of overall risk borne .
What is the MWRR yield?
The money weighted rate return (MWRR) is the rate of return of a portfolio weighted by the capital actually invested. This measure is used by the investor to evaluate the actual return on his investment. … The average invested assets can be calculated by various methods.
What does the risk return frontier indicate?
The efficient frontier is the set of all combinations of assets which, for the same risk, have the highest return and which, for the same return, have the lowest risk.
How do you calculate the variance of a portfolio?
runs (1,2) = Cov (1,2) / (St. dev1 x St. dev2). The variance of the portfolio is the weighted average of several components: a) the variance of the returns of each asset in the portfolio (Var i, where i = 1.2) multiplied by the square of the portfolio weights (Xi2); b) the covariance between the returns of assets 1 and 2.
What is meant by specific risk?
Financial Glossary – Specific Risk
Part of risk, which can be eliminated through diversification, representing the specific risk of a specific company or direct competitors. It is also called diversifiable risk.
What is meant by investment diversification?
Diversification can be defined as the subdivision of your investment into different categories of instruments – such as different stocks, funds, bonds and belonging to different industries or geographies – in order to reduce the total risk.
What is portfolio diversification for?
In financial economics, the diversification of a portfolio of securities consists in reducing the riskiness of its return, linked to the presence of several financial assets, whose returns are not perfectly correlated, within the portfolio itself.
How does the so-called disposition effect manifest itself in finance?
The disposition effect is related to the way in which investors tend to treat the gains and losses realized on financial investments. … In other words, investors avoid regret / pain and seek pride instead.
What is meant by the Capital Market line?
The CML indicates the set of Portfolios that combine market securities with Risk Free Portfolios. … We can understand that the market title is similar to the concept of maximum diversification, as there are many stocks in the market.
How is the risk level of an investment fund measured?
The Sortino Index, also a risk-adjusted return indicator, differs from the Sharpe Index because it relates the fund’s average excess return to the downside risk. The higher the value of these indices, the greater the manager’s ability to remunerate the risk assumed.
What are the risk adjusted performance indicators?
Performance measure is defined as the ratio of a return measure to a risk measure. … It is a series of indicators called risk-adjusted performance (RAP) measures, which summarize both a return and a risk measure in an index.
How is the volatility of a portfolio calculated?
Volatility is mathematically calculated as a percentage distance from its average price values. Let’s take an example: if a stock has recorded a volatility of 10% in a given period, it means that, in this period, the value of the stock has deviated on average by 10% from its average price.
How to calculate the standard deviation of a portfolio?
To calculate the value of the standard deviation σ it is necessary to:
- Calculate the average of the returns (μ)
- Obtain the deviation of each return from the mean (rthe – μ)
- Square the deviations so that all positive values are obtained (rthe – μ) …
- Add all the squared deviations ∑ (rthe – μ)
How is the average portfolio value calculated?
Stock A has a yield of 30 euros (10% * 300 euros), stock B equal to 25 euros, stock C equal to 6 euros. The return on the portfolio will therefore be given by the sum of these 3 (30 euros, 25 euros, 6 euros) divided by the invested capital (1,000 euros) or 61 euros / 1,000, or 0.061 therefore 6.1%.
What does pure tactical asset allocation involve?
The tactical asset allocation approach involves choosing investments on the basis of a short-term time horizon, to improve capital management by taking into account the dynamics of the markets and macroeconomic factors at each specific moment.
What is meant by liquidity risk?
Liquidity risk, what is it
Liquidity risk is the risk of not being able to liquidate portfolio assets with acceptable timing and costs and / or the inability to meet liabilities, such as redemption requests by the subscribers of a mutual fund .
What is a title beta?
Beta measures a stock’s exposure to systematic risk under the Capital Asset Pricing Model. Beta is a measure of the systematic riskiness of the stock: it measures the expected change in the stock’s return for every one percentage point change in the market return.
What characterizes the Time Weighted rate of return TWRR?
TWRR – Time Weighted Rate of Return
The Time Weighted Rate of Return is the rate of return of an investment portfolio weighted on the basis of a reference time period. It is expressed as the average of the simple returns achieved in each period in which there has been no redemption or contribution.
What does the standard deviation of a market return mean?
Standard Deviation – Measures the risk and volatility of your investment and returns. … It therefore indicates the degree of dispersion of returns around their average and represents the uncertainty associated with the possibility of obtaining a return on investment equal to the average itself.
What does the Sortino Index use?
The Sortino index (Sortino ratio) is a financial risk index, developed by the economist Frank A. Sortino, who does not use the classic Beta as a risk index, but focuses (as William F. Sharpe does) on distribution of returns.
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