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12 Cards in this Set
- Front
- Back
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Capital asset pricing model (CAPM)
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A model that relates the required rate of return for a security to its risk as measured by beta.
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Market portfolio
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The portfolio for which each security is held in proportion to its market value.
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Mutual fund theorem
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States that all investors desire the same portfolio of risky assets and can be satisfied by a single mutual fund composed of that portfolio.
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Expected return-beta relationship
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Implication of the CAPM that security risk premiums (expected excess returns) will be proportional to beta.
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Security market line (SML)
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Graphical representation of the expected return-beta relationship of the CAPM.
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Alpha
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The abnormal rate of return on a security in excess of what would be predicted by an equilibrium model such as the CAPM.
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Security characteristic line (SCL)
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A plot of a security's expected excess return over the risk-free rate as a function of the excess return on the market.
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Multifactor models
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Models of security returns positing that returns respond to several systematic factors.
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Arbitrage
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Creation of riskless profits made possible by relative mispricing among securities.
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Arbitrage pricing theory (APT)
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A theory of risk-return relationships derived from no-arbitrage considerations in large capital markets.
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Well-diversified portfolio
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A portfolio sufficiently diversified that nonsystematic risk is negligible.
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Factor portfolio
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A well-diversified portfolio constructed to have a beta of 1.0 on one factor and a beta of zero on any other factor.
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