CAIA Chapter 4: Risk, return, and benchmarking
Risk, return, benchmark
Risk, return, benchmark
Set of flashcards Details
| Flashcards | 24 |
|---|---|
| Language | English |
| Category | Finance |
| Level | University |
| Created / Updated | 17.12.2014 / 13.03.2015 |
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Asset pricing model
is a framework for specifying the return or price of an asset based on its risk, as well as future cash flows and payoffs. Not simply mathematical exercises, but ways of expressing the most fundamental issues relating investion; nature of risks and return
Peer Group
is typically a group of funds with similar objectives, strategies or portfolio holdings
normative model
attempts to describe how people and prices ought to behave
Positive model
attempts to describe how people actually behave
Theoretical models
describe behavior using deduction and assumptions that reflect well-established underlying behavior
Emprirical models
are primarily based on observed behavior
Applied models
are designed to adress real-world challenges and opportunities
Abstract models
also called basic models, have little or no usefulness in solving real-world challenges. Abstract models tend to be theoretical models that explain hypothetical behavior in highly unrealistic scenarios
Cross-sectional models
analyze behavior at a single point in time across various subjects, such as investors or investments.
Time-series models
analyze behavior of a single subject or a set of subjects through time
Panel data sets
track the same subjects through time and can also be referred to as longitudinal data sets and cross-sectional time-series data sets
Single-factor
asset pricing models explain systematic risk using a single risk factor = CAPM
Ex ante models
explain expected relationships, such as expected returns
Systematic return
is the portion of an asset's return driven by a common association
Systematic risk
is the dispersion in economic outcomes caused by variation in systematic return
Idiosyncratic return
is the portion of an asset's return that is unique to an investment and not driven by a common association
Ideosyncratic risk
is the dispersion in economic outcomes caused by investment specific effects
Excess return
of an asset referrs to the excess or deficiency of the asset's return relative to the periodic risk-free rate
Return attribution
is the process of identifying the components of an asset's performance. Return attribution is also called performance attribution
Active return
is the deviation of an asset's return from its benchmark. The benchmark return is attributed to the systematic performance of the asset, and the active return is attributed to the idiosyncratic performance of the asset.
Multifactor models of asset pricing
express systematic risk using multiple factors and are extremely popular throughout traditional and alternative investing. Because they tend to explain systematic returns much better than a single-factor model
Fama-French model
links the returns of assets to three factors: the market portfolio, a factor representing a growth versus value effect, and a factor representing a small-cap versus large-cap effect
Fama-French-Carhart model
adds a fourth factor to the Fama-French model: Momentum (market portfolio, a factor representing a growth versus value effect, and a factor representing a small-cap versus large-cap effect)
Ex post models
describe realized returns
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