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22 Cards in this Set

  • Front
  • Back

page 246
The chance that some unfavorable event will occur.
Stand-Alone Risk

page 246
The risk an investor would face if he or she held only one asset.
Probability Distributions

page 247
A listing of all possible outcomes, or events, with a probability (chance of occurrence) assigned to each outcome.
Expected Rate of Return, r^

page 248
The rate of retun expected to be realized from an investment; the weighted average of the probability distribution of possible results.
Standard Deviation

page 251
A statistical measure of the variability of a set of observations.

page 251
The square of the standard deviation.
Coefficient of Variation (CV)

page 254
Standardized measure of the risk per unit of return; calculated as the standard deviation divided by the expected return.
Risk Aversion

page 255
Risk-adverse investors dislike risk and require higher rates of return as an inducement to buy riskier securities.
Risk Premium (RP)

page 256
The difference between the expected rate of return on a given risky asset and that on a less risky asset.
Expected Return on a Portfolio

page 258
The weighted average of the expected returns on the assets held in the portfolio.
Realized Rate of Reutn

page 258
The return that was actually earned during during some past period. The actual return usually turns out to be dfferent from the expected return except for riskless assets.

page 259
The tendency of two variables to move together.
Correlation Coefficient

page 259
A measure of the degree of relationship between two variables.
Market Portfolio

page 264
A portfolio consisting of all stocks.
Diversifiable Risks

page 264
That part of a security's risk associated with random events; it can be eliminated by proper diversification.
Market Risk

page 264
That part of a security's risk that cannot be eliminated by diversification.
Capital Asset Pricing Model (CAPM)

page 264
A model based on the proposition that any stock's required rate of return is equal to the risk-free rate of return plus a risk premium that reflects only the risk remaining after diversification.
Relevant Risk

page 265
The risk of a security that cannot be diversified away. This is the risk that affects portfolio risk and thus is relevant to a rational investor.
Beta Coefficient

page 266
A metric that shows the extent to which a given a stock's returns move up and dwon with the stock market. Beta thus measures market risk.
Market Risk Premium (RPm)

page 271
The additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk.
Security Market Line (SML) Equation

page 273
An equation that shows the relationship between risk as measured by beta and the required rates of return on individual securities.
Security Market Line (SML)

page 274
The line on a graph that shows the relationship between risk as measured by beta and the required rate of return for individual securities.