CFA Level 1 - Quantitative Methods
(Reading 5) Exam.
Expected Return on a Portfolio - Correct Answer Composed of n assets with weights w
and expected returns r
Covariance of asset returns - Correct Answer Is a measure of how two assets move
together. It is the expected value of the product of the deviations of the two random
variables from their expected values
Properties:
The Covariance of a random variable with itself is its variance
May range from - infinity to + infinity
Positive Covariance means that when one random variable is above the mean, the
other random variable also tends to be above the mean
Negative Covariance is the opposite of Positive Covariance
Portfolio Variance - Correct Answer
Shortfall Risk - Correct Answer Probability that a portfolio value or return will fall below a
particular target value or return over a given period
Roy's Safety First Criterion - Correct Answer States that the optimal portfolio minimizes
the probability that the return of the portfolio falls below some minimum acceptable level
(Threshold level)
We want to minimize P(Rp-RL) Rp is port. return & RL is thresholds level return
Safety-First Ratio - Correct Answer When portfolio returns are normally distributed, then
Roy's Safety First Criterion can be
Lognormal Distribution - Correct Answer The function e^x where x is normally
distributed
Monte Carlo Simulation - Correct Answer A technique based on the repeated
generation of one or more risk factors that affect security values to generate a
distribution of security values.
