Portfolio Construction and Design Flashcards

What is the efficient frontier in modern portfolio theory?

Answer: The set of portfolios offering maximum return for a given risk level

The efficient frontier represents portfolios that offer the highest expected return for each level of risk.

Which metric measures the return per unit of total risk in portfolio analysis?

Answer: Sharpe Ratio

The Sharpe Ratio measures excess return per unit of total risk (standard deviation), helping compare portfolio efficiency.

What does 'correlation' between assets indicate in portfolio construction?

Answer: How assets move in relation to each other

Correlation indicates how two assets move relative to each other, with low or negative correlation providing diversification benefits.

Which asset class is typically added to a portfolio to reduce equity risk through diversification?

Answer: Fixed income / bonds

Fixed income securities like bonds typically have low or negative correlation with equities, providing diversification benefits.

What is 'core-satellite' portfolio construction?

Answer: Combining a stable core with opportunistic satellite positions

Core-satellite construction pairs a low-cost, diversified core with smaller satellite positions targeting specific opportunities or alpha.

In portfolio construction, what does 'liquidity' requirement affect?

Answer: The types and proportions of assets that can be held

A client's liquidity requirement affects which assets can be included and in what proportions, since illiquid assets cannot easily be sold quickly.