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### 28 Cards in this Set

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 expected rate of return the rate of return expected to be realized from an investment; the mean value of the probabality distribution of possible results discrete probability distribution the number of possible outcomes is limited, or finite Continuous probablility distribution the number of possible outcomes is unlimited, or infinite standard deviation a measure of the tightness, or variablility of a set of outcomes variance the standard deviation squared coefficient of variation (CV) a standardized measure of the risk per unit of return. It is calculated by dividing the standard deviation of the expected return. risk aversion risk-averse investors require higer rates of return to invest in higher-risk securities risk premium (RP) the portion of the expected return that can be attributed to the additional risk of an investment. It is the difference b/w the expected rate of return on a given risky asset and the expected rate of return on a less risky asset expected return on a portfolio (Kp) the weighted average expected return on stocks held in a portfolio. realized rate of return (K) the return that is actually earned. The actual return k usually differs from the expected return (k). Correlation Coefficient (r) a measure of the degree of relationship between two variables firm specific (diversifiable) risk the part of a security's risk assocaited with random outcomes generated by events, or behaviors, specific to the firm. It can be eliminated by proper diversification. Market (nondiverifiable) risk the part of the security's risk associated with economic, or market, factors that systematically affect most firms. It cannot be eliminated by diversification. Capital Asset Pricing Model (CAPM) a model used to determine the required rate of return on an asset, which is based on the proposition that any asset's return should be equal to the risk-free return plus a risk premium that reflects the asset's nondiversifiable risk. Relevant Risk the risk of the security that cannot be diversified away; the securities market risk. It reflects the security's contribution to the risk of a portfolio. Beta Coefficient a measure of the extent to which the returns on a given stock move with the stock market. Market Risk Premium (RPm) the additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk. Security Market Line (SML) the line that shows that relationship between risk as measured by beta and the required rate of return for individual securities Equilibrium the condition under which the expected return on a security is just equal to its required return and the price stable Correlation Coefficient (r) a measure of the degree of relationship between two variables firm specific (diversifiable) risk the part of a security's risk assocaited with random outcomes generated by events, or behaviors, specific to the firm. It can be eliminated by proper diversification. Market (nondiverifiable) risk the part of the security's risk associated with economic, or market, factors that systematically affect most firms. It cannot be eliminated by diversification. Capital Asset Pricing Model (CAPM) a model used to determine the required rate of return on an asset, which is based on the proposition that any asset's return should be equal to the risk-free return plus a risk premium that reflects the asset's nondiversifiable risk. Relevant Risk the risk of the security that cannot be diversified away; the securities market risk. It reflects the security's contribution to the risk of a portfolio. Beta Coefficient a measure of the extent to which the returns on a given stock move with the stock market. Market Risk Premium (RPm) the additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk. Security Market Line (SML) the line that shows that relationship between risk as measured by beta and the required rate of return for individual securities Equilibrium the condition under which the expected return on a security is just equal to its required return and the price stable