IPT 1 Chapter 5

Question 1

What are determinants of the level of interest rates?

Answer 1

1. Supply of funds from savers
2. Demand for fund from businesses to be used to finance investments
3. Government’s net demand for funds as modified by actions of the Federal Reserve Bank
4. Expected rate of inflation

Question 2

How do we quantify risk and return?

Answer 2

1. Scenario Analysis
2. Time series analysis of past rates of return

Question 3

What is the sharpe ratio?

Answer 3

The attraction of a portfolio as measured by the ratio of its risk premium to the standard deviation to its excess return

Question 4

What is the Value at risk (VaR)?

Answer 4

The loss corresponding to a very low percentile of the entire return distribution

Question 5

What is the expected shortfall?

Answer 5

Identifies the worst 1% of all observations and takes their average

Question 6

What are two problems with standard deviation as a risk measure?

Answer 6

1. Investors more concerned with negative outcomes and SD treats both negative and positive outcomes as equal
2. SD measures distances from sample average, and investors may be worried about distance from the risk-free rate

Question 7

What is the Sortino ratio?

Answer 7

Alternative of the sharpe that uses the lower partial standard deviation with solves the problems of the SD