Risk Factors, Expected Returns, and Investment Instruments
When considering investments in alternative asset classes beyond risk, return, and correlation, practical complexities must be addressed. Neglecting these distinctions between traditional and alternative investments can jeopardize an investment strategy. Key factors to contemplate include: Defining risk characteristics: Understand the…
Traditional and Risk Based Approaches to Asset Classification
To effectively analyze a portfolio or potential investment opportunities, investors must establish a comprehensive and mutually exclusive categorization scheme, known as the ‘opportunity set.’ This is crucial to ensure that all investments are considered and prevent double-counting or missed opportunities….
Diversifying Equity Risk
Impact of Adding Either Bonds or Alternative Investments to an Equity Portfolio It’s crucial to distinguish between two distinct dimensions of risk: volatility and the likelihood of achieving a target return. To comprehensively evaluate the impact of introducing either bonds…
The Role of Alternative Investments in a Multi-asset Portfolio
When considering adding alternative investments to a portfolio, investors need to know what benefits to expect. Alternative investments span the spectrum between risk-reducing and return-enhancing. This lack of consistency is a familiar theme with alternative investments. Each one will be…
Fixed-income Portfolios for Taxable and Tax-exempt Investors
Taxable and Tax-exempt Investors Taxable and tax-exempt investors share a common goal of maximizing risk-adjusted returns. The CFA exam is designed with a global perspective and does not require candidates to possess specific country knowledge. Nevertheless, noting several similarities in…
Leverage in Fixed-income Portfolios
Leverage in investment involves borrowing funds to be invested, which can amplify the results obtained in a portfolio. When the excess return from borrowed funds exceeds the cost of borrowing, leverage can enhance portfolio performance. However, in the case of…
Models for Fixed Income Returns
Accurately modeling fixed income return involves carefully considering all potential factors contributing to gains and losses when holding the security. The model can produce precise output by thoroughly examining each component and applying sound financial concepts. Though the process may…
Bond Market Liquidity
Liquidity in the financial markets refers to the ease of converting an asset into cash through a sale and the relative ease of buying assets. Assets quickly and easily converted at their intrinsic value are considered liquid. On the other…
Fixed Income Portfolio Measures of Risk, Return and Correlation
Macaulay duration represents the weighted average time to receive a bond's promised payments. It serves as both a sensitivity and time measurement. Modified duration is derived from the Macaulay duration statistic divided by one plus the yield per period. This…
Role of Fixed Income in a Portfolio
Fixed income is also known as debt securities. It is one of the largest financial markets globally, alongside real estate. The fixed-income market has various segments based on credit qualities. It includes types of interest rate agreements: fixed vs. floating….
