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;
22 Cards in this Set
- Front
- Back
|
The chance that some unfavorable event will occur. |
Risk |
|
|
The risk an investor would face if he or she held only one asset. |
Stand-Alone Risk |
|
|
is the risk an investor would face if he or she held only this one asset. |
stand-alone risk |
|
|
Listings of possible outcomes or events with a probability (chance of occurrence) assigned to each outcome. |
Probability Distributions |
|
|
The rate of return expected to be realized from an investment; the weighted average of the probability distribution of possible results. |
Expected Rate of Return, r |
|
|
A statistical measure of the variability of a set of observations. |
Standard Deviation, |
|
|
The standardized measure of the risk per unit of return; calculated as the standard deviation divided by the expected return. |
Coefficient of Variation (CV) |
|
|
Risk-averse investors dislike risk and require higher rates of return as an inducement to buy riskier securities. |
Risk Aversion |
|
|
The difference between the expected rate of return on a given risky asset and that on a less risky asset. |
Risk Premium (RP) |
|
|
A model based on the proposition that any stock’s required rate of return is equal to the risk- free rate of return plus a risk premium that reflects only the risk remaining after diversification. |
Capital Asset Pricing Model (CAPM) |
|
|
The weighted average of the expected returns on the assets held in the portfolio. |
Expected Return on a Portfolio, rp |
|
|
Returns that were actually earned during some past period. Actual returns (r) usually turn out to be different from expected returns (r) except for riskless assets. |
Realized Rates of Return,r |
|
|
The tendency of twovariables to movetogether. |
Correlation |
|
|
A measure of the degree of relationship between two variables. |
Correlation Coefficient |
|
|
That part of a security’s risk associated with random events; it can be eliminated by proper diversification. This risk isalso known as company-specific, or unsystematic,risk. |
Diversifiable Risk |
|
|
The risk that remains in a portfolio after diversification has eliminated all company-specific risk. This risk is also known as non-diversifiable or systematicor beta risk. |
Market Risk |
|
|
A portfolio consisting ofall stocks. |
Market Portfolio |
|
|
The risk that remains once a stock is in a diversified portfolio is its contribution to the portfolio’s marketrisk. It is measured by the extent to which the stock moves up or down with the market. |
Relevant Risk |
|
|
A metric that shows the extent to which a given stock’s returns move upand down with the stockmarket. Beta measures market risk. |
Beta Coefficient, b |
|
|
By definition, bA = 1because an average-risk stock is one that tends to move up and down in step with the general market. |
Average Stock’s Beta, bA |
|
|
The additional return overthe risk-free rate neededto compensate investorsfor assuming an averageamount of risk. |
Market Risk Premium, RPM
|
|
|
An equation that shows the relationship between risk as measured by beta and the required rates of return on individual securities. |
Security Market Line (SML) Equatio |
