dollar-weighted return – a method of measuring the performance of a portfolio during a particular period of time. It is the discount rate that makes the present value of cash flows into and out of the portfolio, as wells as the portfolio’s ending value, equal to the portfolios beginning value.
time-weighted return – method of measuring the performance of a portfolio over a period of time. Effectively, it is the return on one dollar invested in the portfolio at the beginning of the time period.
value-weighted index - Market index in which the contribution of a security to the value of the index is a function of the security’s market capitalization aggregate market value of stocks in index on date t, i.e., market capitalization, typically based on number of“freely floating” outstanding shares (i.e., excluding shares closely held by other companies, control
groups, or government agencies) Iv(t) = [MV(t)/MV(0)]*Iv(0)
Iv(t) = MV(t)/DIVISOR
v = MV(0)/Iv(0)
price-weighted index – market index in which the contribution of a security to the value of the index is a function of the security’s current market price. Ip(t) = [SUMP(t)/SUMP(0)]*Ip(0)
where: SUMP(t) = sum of stock prices of stocks in index on date t Ip(0) = value used to ‘standardize’ index
Ip(t) = SUMP(t)/DIVISORp
where: DIVISORp = SUMP(0)/Ip(0)
attribution analysis - determines the performance of the active return and how well assets were allocated and securities selected. Identifies sources of portfolio’s tracking error return (ter) – Sometimes know as the portfolio’s ‘active return’
– Conducted for a given time period such as a month
– It “explains” ter = rp - r
b for the given time period
• rp is return on portfolio
b is return on benchmark index
– Utilized to see where the portfolio manager is “adding value” for that period – Involves decomposing the portfolio into sectors
• Did manager overweight sectors that did better than the benchmark? – Selection
• Did manager select securities that had higher returns than sector average? – Interaction
• Did manager overweight sectors that he/she was able to earn above-average returns?
benchmark portfolio- a portfolio against which the investment performance of an investor can be compared for the purpose of determining investment skill. A benchmark portfolio represents a relevant and feasible alternative to the actual portfolio and is similar in terms of risk exposure.
margin purchase – the purchase of securities financed by borrowing a portion of the purchase price from a brokerage firm
short sale – the sale of a security that not owned by an investor but rather borrowed from a broker. The investor eventually pays the broker in kind by purchasing the same security back in a subsequent transaction.
initial margin requirement – the minimum percentage of a margin purchase or short sale price that must come from the investor’s own funds.
marking to market – the daily process of adjusting the equity in an investor’s account to reflect the daily changes in the market value of the account’s assets and liabilities.
maintenance margin requirement – the minimum collateral that a brokerage firm requires investors to keep in their margin accounts.
undermargined account – situation in which the collateral in a margin account has fallen below the minimum amount determined by the minimum margin requirement.
margin call – a demand for an investor from a brokerage firm to increase the collateral or decrease the debit balance in the investor’s margin account. The margin call is initiated when the investor’s collateral falls below the minimum amount determined by the maintenance margin requirement.
nominal return- percentage change in the value of a financial asset, where the beginning and ending values are not adjusted for inflation during the period of the investment. Rate at which current money can be traded for future...
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