Risk Management in Portfolios Flashcards

What is 'systematic risk' in portfolio management?

Answer: Market-wide risk that cannot be diversified away

Systematic risk (market risk) affects all investments and cannot be eliminated through diversification.

What does 'beta' measure in portfolio risk analysis?

Answer: A portfolio's sensitivity to market movements

Beta measures how much a portfolio or security moves relative to the overall market, with a beta of 1.0 indicating it moves in line with the market.

What is 'unsystematic risk' also called?

Answer: Idiosyncratic or company-specific risk

Unsystematic risk (idiosyncratic risk) is specific to a company or sector and can be reduced through diversification.

Which tool is commonly used to hedge against portfolio downside risk?

Answer: Put options on the portfolio or index

Put options give the holder the right to sell at a set price, protecting against portfolio losses if markets decline.

What does 'Value at Risk' (VaR) estimate?

Answer: The maximum expected loss over a specific period at a given confidence level

VaR estimates the maximum loss a portfolio could experience over a given time period at a specific confidence level (e.g., 95% or 99%).

How does 'duration' relate to interest rate risk for bond portfolios?

Answer: Higher duration means greater sensitivity to interest rate changes

Higher duration bonds are more sensitive to interest rate changes, meaning their prices will fall more when rates rise.