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17 Cards in this Set

  • Front
  • Back
Diversifiable risk
Risk attributable to firm-specific risk, or nonmarket risk. Nondiversifiable risk refers to systematic or market risk.
Spreading a portfolio over many investments to avoid excessive exposure to any one source of risk.
Efficient frontier of risky assets
The portion of the minimum-variance frontier that lies above the global minimum-variance portfolio.
Firm-specific risk
See diversifiable risk.
Input list
List of parameters such as expected returns, variances, and covariances necessary to determine the optimal risky portfolio.
Insurance principle
The law of averages. The average outcome for many independent trials of an experiment will approach the expected value of the experiment.
Market or systematic risk, firm-specific risk
Market risk is risk attributable to common macroeconomic factors. Firmspecifi c risk reflects risk peculiar to an individual firm that is independent of market risk.
Minimum-variance frontier
Graph of the lowest possible portfolio variance that is attainable for a given portfolio expected return.
Minimum-variance portfolio
The portfolio of risky assets with lowest variance.
Nondiversifiable risk
See systematic risk.
Nonsystematic risk
Nonmarket or firm-specific risk factors that can be eliminated by diversification. Also called unique risk or diversifiable risk. Systematic risk refers to risk factors common to the entire economy.
Optimal risky portfolio
An investor's best combination of risky assets to be mixed with safe assets to form the complete portfolio.
Portfolio opportunity set
The expected return-standard deviation pairs of all portfolios that can be constructed from a given set of assets.
Reward-to-variability ratio
Ratio of a portfolio's risk premium to its standard deviation.
Separation property
The property that portfolio choice can be separated into two independent tasks: (1) determination of the optimal risky portfolio, which is a purely technical problem, and (2) the personal choice of the best mix of the risky portfolio and the risk-free asset.
Systematic risk
Risk factors common to the whole economy, nondiversifiable risk; also called market risk.
Unique risk
See diversifiable risk.