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;
39 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
|
|
A listing of all possible outcomes, or events, with a probability assigned to each outcome
|
Probability Distribution
|
|
the rate of return expected to be realized from an investment; the weighted average of the probability distributions of possible results.
|
Expected Rate of Return
|
|
Beta of a portfolio
|
is the weighted average of the betas of all individual stocks within a portfolio.
|
|
Is the variability a person should expect from the expected return value. A statistical measure of the variability of a set of observations
|
Standard Deviatoin
|
|
The Square of the standard devation
|
Variance
|
|
Standardized measure of the risk per unit of return; calculated as the standard deviation divided be the expected return.
|
Coefficient of Variation (CV)
|
|
investors dislike risk and require higher rates of return as an inducement to buy riskier securities.
|
Risk Aversion
|
|
The difference between expected rate of return on a given risky asset and that on a less risky asset
|
Risk Premium, RP
|
|
The weighted average of the expected returns on the assets in the portfolio.
|
Expected Return on a Portfolio
|
|
The return that was actually earned during some past period. The actual return usually turns our to be different from the expected return except for risk less assets.
|
Realized Rate of Return
|
|
The tendency of two variables to move together.
|
Correlation
|
|
A measure of the degree of relatioinship between two variables.
|
Correlation Coefficient
|
|
A portfolio consistion of all stocks
|
Market Portfolio
|
|
That part of a security's risk associated with random events; it can be eliminated by proper diversification
|
Diversifiable Risk
|
|
The part of a security's risk that cannot be eliminated by diversification.
|
Market Risk
|
|
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 risk of a security that cannot be diversified away. this is the risk that affects portfolio risk and thus is relevant to a rational investor.
|
Relevant Risk
|
|
A metric that shows the extent to which a given stock's returns move up and down with the stock market.
|
Beta Coefficient
|
|
The additional return over the risk-free rate needed to compensate investors for assuming an average amount 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) Equation
|
|
The line on the graph that shows the relationship between risk as measured by beta and the required rate of return for individual securities.
|
Security Market Line (SML)
|
|
Kstock (formula)
|
= RF + (Kmkt -RF) (ßstock)
|
|
D1
|
= D0 ( 1 + g)
|
|
σ
|
standard devation
|
|
P(x)
|
Probability distribution
|
|
CV
|
Coefficient of Varation
|
|
E(xp)
|
Expected Return in Portfolio
|
|
Wi
|
% or Weight of a security in portfolio
|
|
σp
|
Standard deviation of portfolio
|
|
RF
|
risk free rate of return
|
|
Kmkt
|
Market's Required return (ave systematic risk)
|
|
Kstock
|
total return required for any particular stock
|
|
expected return formula
|
E(x) = (P1)(R1) + (P2)(R2)
|
|
Continuous probability distribution.
|
an infinite number of data points to form a smooth, unbroken curve.
|
|
discrete probability distribution.
|
a broken graph with a limited number of data points.
|
|
Steps for finding SD
|
1) Calculate Expected Return E(x)
2) Calculate Deviation => (each possible outcome - E(x) 3) √(Deviation) x P(x) 4) Add up sum of step 3 = variance (σ^2) 5) √(σ^2) = SD (σ) |
|
Coefficient of variance formula
|
σ
----- E(x) |