Core Investment Concepts

These flashcards cover key terms and concepts from the lecture notes on investment theory, portfolio management, behavioral finance, market regulations, and associated theories.

What does alpha (α) represent in investing?

Excess return above a benchmark.

What does a zero alpha indicate?

The portfolio matched the benchmark’s risk-adjusted return.

What is the relationship between risk and return?

Higher risk leads to higher potential return; lower risk leads to lower potential return.

What is the foundation of Modern Portfolio Theory?

Achieving the best return for a given risk through diversification.

What is meant by long-horizon risk?

Longer maturity equals greater interest-rate risk.

Name two types of risk and provide examples.

Systematic: inflation; Idiosyncratic: lawsuits.

What are real assets?

Tangible assets that generate cash flows, like property and machinery.

What are financial assets?

Intangible claims to cash flows, such as stocks and bonds.

What do common stockholders receive?

Voting rights, dividends, and limited liability.

What is a municipal bond?

A bond issued by state or local governments with tax advantages.

Define a complete portfolio.

A combination of risky and risk-free assets.

What is the goal of the minimum-variance portfolio?

To have the lowest possible volatility for a given return.

What is the efficient frontier?

A set of portfolios offering the best risk-return trade-off.

What does the Sharpe ratio measure?

Risk-adjusted performance.

What is the Capital Asset Pricing Model (CAPM)?

A model that describes the relationship between expected return and risk.

What does beta (β) measure?

Volatility versus the market.

What does the term ‘information ratio’ refer to?

Excess return versus benchmark per unit of tracking error.

What is Value at Risk (VaR)?

Estimates max portfolio loss under normal conditions.

What does the Arbitrage Pricing Theory (APT) focus on?

Returns explained by multiple macro factors.

What is the Efficient Market Hypothesis (EMH)?

The theory that prices reflect all available information.

What does 'disposition effect' refer to in behavioral finance?

The tendency to sell winners too early and hold losers too long.

What is an IPO?

Initial Public Offering; when a private firm issues public shares for the first time.

What are financial intermediaries?

Entities that connect savers and borrowers, such as banks and mutual funds.

What is a limit order?

An order to buy/sell at a specified price.

Define margin trading.

Borrowing to invest; it amplifies gains and losses.

What is the purpose of the Sarbanes-Oxley Act?

To require CEO/CFO certification of financial statements.

What is the expected return?

The anticipated return from an investment.