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Chapter 11- Risk and Return
Book: Essentials of Corporate Finance
13
Finance
Undergraduate 3
04/28/2010

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Term
Expected Return
Definition
Return on a risky asset expected in the future
Term
Portfolio
Definition
Group of assets such as stocks and bonds held by an investor
Term
Portfolio Weight
Definition
Percentage of a portfolio's total value in a particular asset
Term
Systematic Risk
Definition
A risk that influences a large number of assets.
Term
Unsystematic risk
Definition
A risk that affects at most a small number of assets.
Term
Principle of Diversification
Definition
Spreading an investment across a number of assets will eliminate some, bu not all, of the risk
Term
Systematic risk principle
Definition
The expected return on a risky asset depends only on that asset's systematic risk
Term
Beta Coefficient
Definition
Amount of systematic ris present in a particular risky asset relative to that in an average risky asset.
Term
Security Market Line (SML)
Definition
Positively sloped straight line displaying the relationship between expected return and beta
Term
Market Risk Premium
Definition
Slop of the SML, the difference between the expected return on a market portfolio and the risk-free rate
Term
Capital Asset Pricing Model (CAPM)
Definition
Equation of the SML showing the relationship between expected return and beta
Term
Cost of Capital
Definition
The minimum required return on a new investment
Term
Risk Premium on an Asset
Definition
The reward for bearing risk
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