Security Prices and Portfolio Analysis

A portfolio that combines individually good assets does not guarantee overall portfolio performance. Portfolio efficiency can be achieved by considering correlations and diversification.

A forward contract buyer (long position) needs to deposit margin as they are obligated to fulfill the contract. The seller (short position) doesn't have to deposit margin because they are not obligated to purchase the asset.

The real risk-free rate is not actively published but is a theoretical concept calculated by using market data like government bonds. It represents the expected return on a risk-free investment without inflation.

Front-end load fees are paid only once upfront when buying mutual funds, whereas management fees are charged annually as a percentage of the fund's assets.

Strong form efficiency assumes even insider information cannot predict future returns. It implies that markets reflect all information including private knowledge.

Investing in foreign securities can lower overall portfolio risk by diversifying across different markets and reducing dependence on a single country's economic conditions.

The nominal value of a share is often different from its market price. The book value, representing equity on the balance sheet, also doesn't directly correlate to market capitalization.

Pure auction markets operate with buyers and sellers submitting bids and asks for a specific stock. The matching of these orders occurs at a central location.

Technical analysts believe that security prices adjust quickly to reflect new information, contradicting the idea of slow adjustment.

The correlation coefficient is not simply the square root of covariance. They are related but different concepts. The correlation coefficient is a standardized measure of the linear relationship between returns, while covariance is a raw measure of how the returns of two assets move together.

One of the assumptions of the standard CAPM is that investors can borrow or lend at the risk-free rate, enabling them to adjust their portfolio's risk level without limitations.

Large-cap stocks are stocks of companies with large market capitalization, not necessarily high book value. Market capitalization reflects the total value of a company's outstanding shares

Primary markets issue new securities (like IPOs), while secondary markets exchange existing securities already issued by companies.

Tactical asset allocation involves short-term adjustments to asset weights, deviating from the long-term strategic asset allocation in response to market conditions and opportunities.

A bearish engulfing pattern is characterized by a black candle followed by a white candle that completely engulfs the black candle, signaling a potential trend reversal.

The Capital Asset Pricing Model (CAPM) states that portfolios on the Security Market Line (SML) are combinations of the risk-free asset and the market portfolio (M). All efficient portfolios lie on the SML.

The total expense ratio (TER) is a percentage representing the total costs associated with managing a mutual fund. These costs include administrative expenses, marketing fees, and fund manager compensation.

Strategic asset allocation is a long-term investment strategy where the proportions of different asset classes (like stocks, bonds, and real estate) within a portfolio are predetermined and maintained over time. It focuses on long-term goals rather than trying to time market fluctuations.

Beta-hedging with index futures aims to eliminate market risk (systemic risk) by using index futures contracts. The idea is to match the portfolio's beta (market sensitivity) with the beta of the index futures.

The Fama-French three-factor model is a financial model that expands on the Capital Asset Pricing Model (CAPM) by adding two additional factors to explain stock returns: size (market capitalization) and value (book-to-market ratio).

Active portfolio management aims to outperform a benchmark index by using strategies like market timing, stock selection, or sector rotation. The goal is to generate higher returns than the benchmark by taking calculated risks.

Increasing the correlation among normally distributed assets in a portfolio leads to a higher portfolio standard deviation. This is because highly correlated assets tend to move together, increasing the overall volatility of the portfolio.

Tobin separation states that when a risk-free asset is added to the Markowitz portfolio theory, investors will optimally allocate their funds between the risk-free asset and a market portfolio, which is a diversified portfolio of all risky assets.

Jensen's alpha is a measure of a portfolio's performance that adjusts for risk. It calculates the difference between the actual return of a portfolio and its expected return based on a given risk model, often the CAPM. A positive alpha signifies outperformance relative to the model.