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13 Cards in this Set

  • Front
  • Back
What is portfolio theory?
selection of optimal portfolio by rational risk averse investors
What is capital markets theory?
security prices based on decisions of investors
How do you define risk?
chance of achieving returns lower than expected
1 Standard Deviation incorporates what percentage of expected values?
How does correlation impact diversification?
the less the correlation among security returns, the great the impact of diversification on reducing variability
What is systematic risk?
market related risk, not diversifiable, results from each and every security depending somewhat on the overall performance of the market
What is unsystematic risk?
risk that can be diversified
What is the "law of one price"?
assets with the same systematic risk should have the same expected rate of return
What are the underlying assumptions of CAPM?
1. people are risk averse
2. common time horizon
3. people have some expectations
4. no external/other frictional costs
What are the limitations of CAPM?
assumes only risk is future security price; other risks: future labor income, future relative prices, future investment opportunities
What is multifactor CAPM?
takes in to consideration other risks, other than security price risk, "extra-market" risks
What is the Arbitrage Pricing Theory (APT) model?
security's expected return is influenced by a variety of factos; not just single market index of CAPM
What are the possible APT factors for risk?
1. unanticipated changes in industrial production
2. unanticipated changes in spread betweem yield on low grade and high grade bonds
3. unanticipated shape of the yield curve
4. unanticipated changes in inflation