Reading...
Play button
Play button
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;
15 Cards in this Set
- Front
- Back
|
total return
|
expected return + unexpected return
|
|
|
normal/expected return
|
part of the return that investors predict or expect
|
|
|
uncertain/risky return
|
comes from unexpected information revealed during the year
|
|
|
announcements/news
|
periodic announcements about events can significantly impact the profits.
ex: earnings, product development, personnel announcement = expected news + surprise news |
|
|
systematic/market risk
|
risk that influences a large number of assets
also known as non-diversifiable risk |
|
|
unsystematic/unique/firm-specific risk
|
risk that influences a single company or a small group of companies
also known as diversifiable risk |
|
|
systematic risk principle
|
states the expected return on an asset depends only on its systematic risk.
|
|
|
beta coefficient
|
measures the relative systematic risk of an asset.
assets with this larger than 1.0 have more systematic risk than average (greater expected returns) assets with this smaller than 1.0 have less systematic risk than average to 0 (risk free asset) |
|
|
portfolio beta
|
you can multiply each asset's beta by its portfolio weight and then add the results to get the portfolio's beta
|
|
|
reward to risk ratio
|
all combinations of portfolios expected returns and betas fall on a straight line
(expected return - risk free rate) / beta |
|
|
security market line (SML)
|
graphical representation of the linear relationship between systematic risk and expected return in financial markets
|
|
|
market risk premium
|
(expected return of market - risk free rate)
|
|
|
capital asset pricing model (CAPM)
|
theory of risk and return for securities on a competitive capital market
E(Ri) = R(f) + ( E(Rm) - R(f) ) * beta |
|
|
beta equation
|
Corr( Ri, Rm ) * ( std. deviation(i) / std. deviation(m) )
how closely correlated the security's return is with the overall market's return and how volatile the security is relative to the market |
|
|
Fama-french three-factor model
|
in addition to beta, two other factors appear to be useful in explaining the relationship between risk and return:
size --> measured by market capitalization book value to market value ratio (B/M) considers the fact that value and small cap stocks outperform markets on a regular basis |
