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21 Cards in this Set
- Front
- Back
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A method to measure the variability of returns-the expected square deviation of returns from the mean |
Variance |
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A common method used to measure the risk of a probability distribution- the square root of the variance |
Standard deviation |
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All - have lower returns and/or higher risk than the portfolios |
Individual stocks |
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Risk that is linked across outcomes |
Common risk |
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Risk that bears no relation to other risks. If risks are -, then knowing the outcome of one provides no info about the other |
Independent risk |
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The averaging of independent risks in a large portfolio |
Diversification |
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Fluctuations of a stock’s return that are due to a company- or industry specific news and are independent risks unrelated across stocks |
Unsystematic risk |
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Fluctuations of a stock’s return that are due to market wide new representing common risk |
Systematic risk |
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The - of a security is determined by its systematic risk and does not depend on its diversifiable risk |
Risk premium |
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- is the total risk, measured as standard deviation, of a portfolio |
The volatility of a portfolio |
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Is the portfolio of all risky investments, held in proportion to their value |
Market portfolio |
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A portfolio whose return should track the underlying, unobservable market portfolio |
Market proxy |
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We compare a stock’s historical returns to the market’s historical returns to determine a stock’s - |
Beta |
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Beta is the expected - in the excess return of the security for a 1% change in the excess return of the market portfolio |
Percentage change |
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The relative proportions of debt, equity, and other securities that a firm has outstanding |
Capital structure |
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The - is the yield that investors demand to hold the firms debt |
Yield to maturity |
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Estimate the market risk premium, typically by comparing historical returns on a market proxy to contemporaneous risk-free rates |
Capital Asset Pricing model (CAPM) |
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The market risk of the project is equivalent to the average market risk of the firm’s investments |
Average risk |
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Project is financed with the same mix of stocks and debt as before |
Constant debt-equity ratio |
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No bankruptcy concern |
Limited leverage effects |
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Done |
Done |
