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