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15 Cards in this Set
- Front
- Back
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Capital allocation line (CAL)
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A graph showing all feasible risk-return combinations of a risky and risk-free asset.
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Capital market line (CML)
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A capital allocation line provided by the market index portfolio.
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Certainty equivalent rate
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The certain return providing the same utility as a risky portfolio.
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Complete portfolio
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The entire portfolio, including risky and risk-free assets.
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Fair game
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An investment prospect that has a zero risk premium.
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Indifference curve
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A curve connecting all portfolios with the same utility according to their means and standard deviations.
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Mean-variance criterion
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The selection of portfolios based on the means and variances of their returns. The choice of the higher expected return portfolio for a given level of variance or the lower variance portfolio for a given expected return.
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Passive strategy
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See passive management.
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Reward-to-variability ratio
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Ratio of a portfolio's risk premium to its standard deviation.
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Risk-averse, risk-neutral, risk lover
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A risk-averse investor will consider risky portfolios only if they provide compensation for risk via a risk premium. A risk-neutral investor finds the level of risk irrelevant and considers only the expected return of risk prospects. A risk lover is willing to accept lower expected returns on prospects with higher amounts of risk.
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Risk lover
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See risk-averse.
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Risk-neutral
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See risk-averse.
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Risk premium
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An expected return in excess of that on riskfree securities. The premium provides compensation for the risk of an investment.
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Risk-free asset
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An asset with a certain rate of return; often taken to be short-term T-bills.
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Utility
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The measure of the welfare or satisfaction of an investor.
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