Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
12 Cards in this Set
- Front
- Back
|
Expected returns |
Based on the probability of possible outcomes "expected" means average if the process is repeated many times does not have to be a possible return |
|
|
Variance and standard deviation |
Measure the volatility of returns |
|
|
Portfolio |
Collection of assets An asset's risk and return are important in how they affect the risk and return of the portfolio The risk-return trade-off for a portfolio is measured by the portfolio expected return and standard deviation, just as with individual assets |
|
|
Portfolio expected returns |
the weighted average of the expected returns of the respective assets in the portfolio |
|
|
Announcements, News, and Market Efficiency |
Announcements and news contain both an expected component and surprise component Surprise component effects stock's price and therefore its return The easier is it to trade on surprises, the more efficient markets should be |
|
|
Systematic risk |
Risk factors that affect a large number of assets (cannot be diversified away) also known as non-diversifiable risk or market risk Example: surprise in actual GDP growth, inflation rates, Fed's surprise change in interest rate policy |
|
|
Unsystematic Risk |
Risk factors that affect a limited number of assets Also known as diversifiable risk, unique risk, firm-specific risk, asset-specific risk, and idiosyncratic risk Example: labor strikes, management turnover |
|
|
The Diversification Principle |
Diversification can substantially reduce volatility of returns without an equivalent reduction in expected returns Eliminates some but NOT all risks Portfolio diversification is the investment in several different asset classes or sectors Diversification is NOT just holding a lot of assets |
|
|
Total risk |
Systematic risk + unsystematic risk Standard deviation of returns is a measure of total risk |
|
|
Capital Asset Pricing Model |
Expected return on an investment is equal to the risk free rate plus a risk premium proportional to the amount of systematic risk (measured by beta) |
|
|
Beta |
A beta of 1 implies the asset has the same systematic risk as the overall market A beta<1 implies the asset has less systematic risk than the overall market A beta>1 implies the asset has more systematic risk than the overall market |
|
|
Security market line (SML) |
represents market equilibrium SML is a positively sloped straight line showing the relationship between expected return and beta The intercept is the (nominal) risk-free rate The slope is the market risk premium If reward to risk ratio is high the stock plots ABOVE the SML, and the stock is over-valued. If reward to risk ratio is low the stock plots BELOW the SML, and the stock is under-valued. |
