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39 Cards in this Set
- Front
- Back
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The chance that some unfavorable event will occur
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Risk
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The risk an investor would face if he or she held only one asset.
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Stand-Alone Risk
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A listing of all possible outcomes, or events, with a probability assigned to each outcome
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Probability Distribution
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the rate of return expected to be realized from an investment; the weighted average of the probability distributions of possible results.
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Expected Rate of Return
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Beta of a portfolio
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is the weighted average of the betas of all individual stocks within a portfolio.
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Is the variability a person should expect from the expected return value. A statistical measure of the variability of a set of observations
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Standard Deviatoin
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The Square of the standard devation
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Variance
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Standardized measure of the risk per unit of return; calculated as the standard deviation divided be the expected return.
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Coefficient of Variation (CV)
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investors dislike risk and require higher rates of return as an inducement to buy riskier securities.
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Risk Aversion
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The difference between expected rate of return on a given risky asset and that on a less risky asset
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Risk Premium, RP
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The weighted average of the expected returns on the assets in the portfolio.
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Expected Return on a Portfolio
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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.
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Realized Rate of Return
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The tendency of two variables to move together.
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Correlation
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A measure of the degree of relatioinship between two variables.
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Correlation Coefficient
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A portfolio consistion of all stocks
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Market Portfolio
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That part of a security's risk associated with random events; it can be eliminated by proper diversification
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Diversifiable Risk
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The part of a security's risk that cannot be eliminated by diversification.
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Market Risk
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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.
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Capital Asset pricing Model (CAPM)
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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.
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Relevant Risk
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A metric that shows the extent to which a given stock's returns move up and down with the stock market.
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Beta Coefficient
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The additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk.
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Market Risk Premium. RPm
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An equation that shows the relationship between risk as measured by beta and the required rates of return on individual securities.
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Security Market Line (SML) Equation
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The line on the graph that shows the relationship between risk as measured by beta and the required rate of return for individual securities.
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Security Market Line (SML)
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Kstock (formula)
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= RF + (Kmkt -RF) (ßstock)
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D1
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= D0 ( 1 + g)
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σ
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standard devation
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P(x)
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Probability distribution
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CV
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Coefficient of Varation
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E(xp)
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Expected Return in Portfolio
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Wi
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% or Weight of a security in portfolio
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σp
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Standard deviation of portfolio
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RF
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risk free rate of return
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Kmkt
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Market's Required return (ave systematic risk)
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Kstock
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total return required for any particular stock
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expected return formula
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E(x) = (P1)(R1) + (P2)(R2)
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Continuous probability distribution.
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an infinite number of data points to form a smooth, unbroken curve.
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discrete probability distribution.
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a broken graph with a limited number of data points.
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Steps for finding SD
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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) |
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Coefficient of variance formula
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σ
----- E(x) |
