Efficient Diversification and Investment Processes

This set of flashcards covers essential concepts from the lecture notes on efficient diversification, investment processes, and related financial instruments.

What are the two types of portfolios in investment management?

Active and Passive portfolios.

What is the difference between systematic and nonsystematic risks?

Systematic risks affect the entire market, while nonsystematic risks are specific to individual firms.

What is firm-specific risk also known as?

Residual risk or unique risk.

What types of risk can be diversified?

Diversifiable risks can be reduced through diversification, while non-diversifiable risks cannot.

What is Alpha in investment terms?

Alpha measures the excess return of an investment relative to the return of a benchmark index.

What does the efficient frontier represent?

The set of optimal portfolios offering the highest expected return for a defined level of risk.

What is the capital allocation line?

A line that represents different combinations of risk-free assets and risky assets.

What is the definition of excess return?

The return on an investment above the benchmark return.

What is an investment opportunity set?

The set of all possible combinations of risky assets.

What does the Security Characteristic Line illustrate?

The relationship between the excess return of a security and the excess return of the market.

What is the Sharpe Ratio used to measure?

The risk-adjusted return of an investment.

What is Fundamental Analysis?

An analysis method for evaluating a security by attempting to measure its intrinsic value.

What is the Top-Down analysis approach?

An approach that starts with the economy and works down to individual securities.

What do PE ratios indicate?

The price-to-earnings ratio indicates the relative value of a company's shares.

What do GDP, unemployment rate, inflation, and budget deficit represent?

They are key indicators of economic health.

What is the purpose of fiscal and monetary policy?

To manage economic growth, inflation, and employment levels.

What are leading, coincidental, and lagging economic indicators?

Leading indicators predict future economic activity, coincidental indicators occur in real time, and lagging indicators reflect historical data.

What is an Investment Policy Statement?

A document that outlines the strategy for investment management.

What is the difference between investment grade and speculative grade corporate bonds?

Investment grade bonds have a lower risk of default, while speculative grade bonds carry a higher risk.

What are the primary markets?

Markets where new securities are created and sold for the first time, such as IPOs.

What are derivatives in finance?

Financial contracts whose value is based on the price of an underlying asset.

What are private equity firms?

Investment firms that invest in private companies or buyouts of public companies.

What is the purpose of regulation in the financial markets?

To enforce rules that protect investors and maintain fair, orderly, and efficient markets.

What is the Sarbanes Oxley Act?

A U.S. law that mandates strict reforms to improve financial disclosures from corporations.