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32 Cards in this Set
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Holding Period Return

the rate of return earned on an investment, which equals the dollar gain divided by the amount invested

Expected Rate of Return

the average of all possible outcomes where those outcomes are weighted by the probability that each will occur

What is risk?

variability in future cash flows

What is standard deviation?

statistical measure of the spread of probability distribution .

What is company unique risk/unsystematic/diversifiable risk?

the risk related to an investment return that can be eliminated through diversification.

What is systematic risk?

the risk related to an investment that cannot be eliminated through diversification
Called market risk and nondiversiable risk 
What is a characteristic line?

the line of best fit through a series of returns for a firms stock relative to the markets returns
Slope of the line = beta 
What is a beta?

is the relationship between an investments returns and the markets returns
measure of the investments nondiversible risk 
What is a portfolio beta?

the relationship between a portfolio's return and the market returns. It is a measure of the portfolios nondiversiable risk

What is asset allocation?

identifying and selecting the asset classes appropriate for a specific investment portfolio and determining the proportions of those assets within the portfolio

What is required rate of return?

minimum rate of return necessary to attract an investor to purchases or hold a security

What is the risk free rate of return?

rate of return on risk free investments

What is the risk premium?

the additional return expected for assuming risk

What is the capital asset pricing model?

an equation stating that the expected rate of return on a projet is a function of the risk free rate and the systematic risk and the expected risk premium for the market portfolio

What is the security market line?

the return line that reflects the attitudes of investors regarding the minimum acceptable return for a given level of systematic risk associated with a security

Cash Flows

are the relevant measure of returns

How to quantify the measure of risk?

use standard deviation
higher the standard deviation the more uncertain the risk or higher the risk 
How do you choose which investment you would like to make based on the standard deviation?

It is up to the user. Compare the standard deviations and the expected return rates.

What doe most stocks have betas between?

.60 and 1.60

What does stock with a beta of 1 indicate?

Systemisc or market risk equal to the typical stock

What does a stock with a beta of 0 indicate?

No systematic risk

What is asset allocation?

Diversifying between a portfolio of stocks and a portfolio of bonds
The market rewards the patient investor 
What is used as a practical approach to measure a investors required rate of return?

Capital Asset Pricing Model

What is the graphical representation of the CAPM?

Security Market Line

Diver/Company/Unsystematic Risk

What represents about 60% of total risk and can be eliminated?

NonDiversifiable/Market/Systematic Risk

What represents 40% of total risk and is relevent risk?

60% of total risk by combing 20 or stocks together
Remaining is known as market risk 
What is composed in a diversified portfolio?

Combine stocks that are negatively correlated to each other that is when one moves up in response the other moves down or low postive correlation

How does combining assets in a portfolio decrease risk?

moves less than the market
more than the market 
What does a beta less than 1 mean and a beta more than 1 mea?

Look at standard deviation

What do you look at for total risk?

Look at Beta

What do you look at for market risk?

Market Forces and Supply and Demand

What can we only expect to learn from the SML?
