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Questions and Answers
What is the primary focus of FIN 355?
What is the primary focus of FIN 355?
- Teaching advanced portfolio management techniques
- Analyzing macroeconomic factors affecting global markets
- Introducing equity and debt markets (correct)
- Exploring cryptocurrency investment strategies
What is the main objective of the final lecture in FIN 355?
What is the main objective of the final lecture in FIN 355?
- Focus solely on theoretical financial models without practical applications
- Introduce entirely new investment concepts not covered in previous lectures
- Discuss historical trends in stock market performance
- Review key ideas from earlier lectures and discuss their relation to common investing approaches (correct)
What does FIN 355 aim to provide experience with?
What does FIN 355 aim to provide experience with?
- Predicting short-term stock price movements
- Cryptocurrency mining techniques
- Mathematical measures and concepts related to portfolio risk and return calculations (correct)
- Advanced algorithmic trading strategies
What is briefly introduced in FIN 355?
What is briefly introduced in FIN 355?
What does the balance sheet equation Assets = Debt + Equity explain?
What does the balance sheet equation Assets = Debt + Equity explain?
What is the basis for the price of financial assets?
What is the basis for the price of financial assets?
How is total risk measured?
How is total risk measured?
What characteristic differentiates debt and equity contracts?
What characteristic differentiates debt and equity contracts?
Which type of investment generally offers higher returns but with more volatility?
Which type of investment generally offers higher returns but with more volatility?
What does the standard deviation measure in the context of investments?
What does the standard deviation measure in the context of investments?
Which type of investments tend to have higher volatility in returns compared to debt investments?
Which type of investments tend to have higher volatility in returns compared to debt investments?
What do historical returns for different types of investments show?
What do historical returns for different types of investments show?
What do savings accounts typically have in terms of returns?
What do savings accounts typically have in terms of returns?
What do equity investments like the S&P 500 generally offer in terms of returns?
What do equity investments like the S&P 500 generally offer in terms of returns?
What topics are covered in the assignments for each module of the course?
What topics are covered in the assignments for each module of the course?
What does the course FIN 355 provide a comprehensive understanding of?
What does the course FIN 355 provide a comprehensive understanding of?
What is the primary trading location for stocks in the US?
What is the primary trading location for stocks in the US?
Which financial reporting requirements do public firms have to adhere to?
Which financial reporting requirements do public firms have to adhere to?
What measures and summaries of returns are commonly used?
What measures and summaries of returns are commonly used?
What does the Capital Allocation Line (CAL) show?
What does the Capital Allocation Line (CAL) show?
What does traditional portfolio theory assume about investor preferences?
What does traditional portfolio theory assume about investor preferences?
What topics are covered in the course outline?
What topics are covered in the course outline?
What changes the formula for portfolio expected returns and risk?
What changes the formula for portfolio expected returns and risk?
What does the weighted average intuition apply to in the expected return equation?
What does the weighted average intuition apply to in the expected return equation?
What does the final exam cover?
What does the final exam cover?
What topics are covered in the course?
What topics are covered in the course?
What do investors commonly use for trading stocks?
What do investors commonly use for trading stocks?
What do stock indices track?
What do stock indices track?
What does diversification primarily mitigate?
What does diversification primarily mitigate?
Which risk can be broken down into firm-specific and systematic components?
Which risk can be broken down into firm-specific and systematic components?
According to the CAPM formula, what does it suggest a relation between?
According to the CAPM formula, what does it suggest a relation between?
What does the variance formula for a portfolio with multiple risky assets suggest?
What does the variance formula for a portfolio with multiple risky assets suggest?
How can specific investment weights affect risk?
How can specific investment weights affect risk?
What does leftward movement along the efficient frontier indicate?
What does leftward movement along the efficient frontier indicate?
What do portfolios along the efficient frontier offer through investment weight choices?
What do portfolios along the efficient frontier offer through investment weight choices?
When do the most efficient portfolios appear along the efficient frontier?
When do the most efficient portfolios appear along the efficient frontier?
What type of frontier can be traced out whether using only two or many underlying risky assets?
What type of frontier can be traced out whether using only two or many underlying risky assets?
Where do the most efficient portfolios appear if there is a risk-free asset?
Where do the most efficient portfolios appear if there is a risk-free asset?
What can investors do if they can invest in both risky and risk-free assets?
What can investors do if they can invest in both risky and risk-free assets?
What does the Capital Allocation Line (CAL) tangent to the efficient frontier represent?
What does the Capital Allocation Line (CAL) tangent to the efficient frontier represent?
How do less correlated assets affect the efficient frontier and the Capital Allocation Line (CAL) tangent?
How do less correlated assets affect the efficient frontier and the Capital Allocation Line (CAL) tangent?
What is the range of correlation between assets according to the text?
What is the range of correlation between assets according to the text?
What happens when new asset classes are introduced according to the text?
What happens when new asset classes are introduced according to the text?
What does the Capital Asset Pricing Model (CAPM) estimate the expected return as a function of?
What does the Capital Asset Pricing Model (CAPM) estimate the expected return as a function of?
What does the Capital Asset Pricing Model (CAPM) predict about the expected return on an asset?
What does the Capital Asset Pricing Model (CAPM) predict about the expected return on an asset?
What does the Security Market Line (SML) depict according to the text?
What does the Security Market Line (SML) depict according to the text?
What do multifactor models like the Fama-French 3-factor model measure?
What do multifactor models like the Fama-French 3-factor model measure?
Study Notes
Portfolio Theory, Efficient Frontier, and Risk-Return Models
- The Capital Allocation Line (CAL) tangent to the efficient frontier has the highest Sharpe ratio among all possible CALs.
- The CAL represents possible portfolios created with the tangency portfolio and the risk-free asset, which is a combination of risky assets.
- Less correlated assets shift the frontier left, increasing the Sharpe ratio of the CAL tangent.
- Correlation is bounded between -1 and 1, and diversification benefits exist even for assets with 0 correlation.
- Introducing new asset classes shifts the frontier left, creating portfolios with better risk-return profiles.
- The rightmost frontier is attainable using only US and foreign equity and corporate bonds, while the left-most frontier is attainable by adding REITs and Commodities alongside the other asset classes.
- The Capital Asset Pricing Model (CAPM) is a famous risk-return model, estimating the expected return as a function of systematic risk (beta) and market risk premium.
- The CAPM assumptions include rational mean-variance optimization and the pursuit of the portfolio with the highest Sharpe ratio on the efficient frontier.
- The CAPM predicts that the expected return on an asset is the risk-free rate plus a risk premium based on systematic risk measured by beta.
- The Security Market Line (SML) depicts the CAPM model, with the height representing the expected return for a given beta.
- The CAPM has limitations due to unrealistic assumptions and varying opinions on the market risk premium.
- Multifactor models like the Fama-French 3-factor model also measure market risk but assume the need for multiple betas to adequately capture it.
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Description
Test your knowledge of Portfolio Theory, Efficient Frontier, and Risk-Return Models with this quiz. Explore concepts such as the Capital Allocation Line, diversification benefits, the Capital Asset Pricing Model (CAPM), and the Fama-French 3-factor model. Sharpen your understanding of risk and return in investment portfolios.
