Portfolio theory, risk and return, and asset allocation concepts tested on CFA Level 1.
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- What is portfolio management?
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The process of combining assets to achieve an investor's risk and return objectives.- What effect does diversification have on unsystematic risk?
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It reduces or eliminates unsystematic risk.- What is systematic risk?
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Risk inherent to the entire market that cannot be eliminated through diversification.- What is unsystematic risk?
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Risk specific to an individual company or industry that can be eliminated through diversification.- How is an asset's total risk decomposed?
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Total risk equals systematic risk plus unsystematic risk.- What does beta measure?
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An asset's systematic risk relative to the overall market.- Under the CAPM, expected return equals the risk-free rate plus beta times the ____.
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market risk premium- In the CAPM formula, what does the risk-free rate represent?
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The return on an asset with no default or reinvestment risk, the baseline compensation for time.- What is the market risk premium?
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The expected market return minus the risk-free rate.- What does the Security Market Line (SML) plot?
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Expected return against beta for individual securities or portfolios.- What does the Capital Market Line (CML) plot?
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Expected return against standard deviation for efficient portfolios combining the risk-free asset and the market portfolio.- What is the Capital Allocation Line (CAL)?
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A line showing risk-return combinations from mixing a risk-free asset with a single risky portfolio.- What is the efficient frontier?
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The set of portfolios offering the highest expected return for each level of risk.- What is the minimum-variance portfolio?
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The portfolio on the efficient frontier with the lowest possible risk.- What is the optimal risky portfolio also called?
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The tangency portfolio, where the CAL is tangent to the efficient frontier.
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