Term
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Definition
based on probability of possible outcomes
"expected" is analogous to "average" if the process is repeated many times
E(R) equation--piRi
(all possible outcomes, probability it will occur) |
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Term
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Definition
| a collection of assets (stocks, bonds) |
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Term
| The portfolio weight of an individual security is |
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Definition
| securities value / total portfolio value |
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Term
| The risk-return tradeoff for a portfolio is measured by the |
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Definition
| portfolio expected return and SD |
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Term
| Asset's risk and return are important in how they affect the |
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Definition
| risk and return of the portfolio |
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Term
| Portfolio Expected Returns |
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Definition
weighted average of the expected returns for each asset in the portfolio
(weight of the portfolio x expected return of security) |
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Term
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Definition
compute:
-portfolio return
-portfolio expected return
-portfolio variance and standard deviation using the same formulas as for individual assets
-DO NOT WEIGHT THE VARIANCES OF THE INDIVIDUAL SECURITIES IN THE PORTFOLIO |
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Term
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Definition
contain both expected and surprise component
only the surprise component affects a stock's price and therefore its return |
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Term
| Efficient markets are a result of investors trading on the |
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Definition
| unexpected portion of announcements |
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Term
| easier trade, what happens to the market? |
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Definition
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Term
| Will markets have random price changes? |
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Definition
| yes, because of surprises in the market |
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Term
| Realized returns are generally not equal to |
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Definition
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Term
| over time, the average of the unexpected component is |
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Definition
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Term
| unexpected returns can be either... |
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Definition
| positive or negative at any point in time |
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Term
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Definition
| expected return + unexpected return |
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Term
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Definition
risk that affects a large number of assets
(also non-diversifiable or market risk)
CAN'T GET RID OF SYSTEMATIC RISK |
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Term
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Definition
affects a limited number of assets
(diversifiable or asset-specific risk) |
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Term
| unexpected return equation |
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Definition
| systematic portion + unsystematic portion |
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Term
| total return including systematic |
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Definition
= expected return + systematic portion + unsystematic portion
(because total return = expected return + unexpected return
broken down more) |
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Term
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Definition
investment in several different asset classes or sectors
(not just holding a lot of assets) |
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Term
| Diversification can substantially ______ the variability of returns ____ an equivalent reduction in expected returns |
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Definition
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Term
| worse than expected returns from one asset and its relationship to better than expected returns from another |
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Definition
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Term
| there's a minimum level of risk that cannot be diversified away |
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Definition
| systematic risk (non-diversifiable risk) |
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Term
| Diversifiable Risk can be eliminated by |
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Definition
| combining assets into a portfolio |
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Term
| if you only hold one asset, or assets in the same industry, then you are exposing yourself to |
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Definition
| risk that could be diversified away |
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Term
| for well-diversified portfolios, unsystematic risk is |
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Definition
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Term
| the total risk for a diversified portfolio is essentially equivalent to the |
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Definition
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Term
| Systematic Risk Principle |
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Definition
there is a reward for bearing risk
there is NOT a reward for bearing risk unnecessarily
the expected return on a risky asset depends only on that asset's systematic risk since unsystematic risk can be diversified away
(taking more than necessary risk to get payback) |
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Term
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Definition
combos of assets that produce the attainable portfolios with the highest expected return for a given standard deviation yield this frontier
in other words--no way to attain a higher expected return unless you are willing to take more risk |
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Term
| adding more assets could be a way to attain |
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Definition
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Term
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Definition
measure of systematic risk
how much the stock price moves on average when the market moves |
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Term
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Definition
| the asset has the same systematic risk as the overall market |
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Term
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Definition
| the asset has less systematic risk than the overall market |
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Term
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Definition
| the asset has more systematic risk than the overall market |
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Term
| Total risk is determined by the |
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Definition
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Term
| systematic risk is determined by the |
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Definition
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Term
| higher expected return is determined by the |
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Definition
| systematic risk, aka beta |
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Term
| the beta of a portfolio is |
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Definition
| the weighted average of the individual asset betas |
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Term
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Definition
the greater the risk premium
expected return - risk free rate |
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Term
| in equilibrium, all assets and portfolios must have the same _____ and they must equal ____ |
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Definition
| reward-to-risk ratio ; reward-to-risk ratio for the market |
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Term
| The beta of the market always equals |
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Definition
| 1; so you can take it out of the denominator of the Security Market Line equation |
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Term
| the SML is the representation of the |
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Definition
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Term
| In equilibrium, the ratio of an asset's expected risk premium to its beta is equal to |
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Definition
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Term
| the slope of the security market line is equal to the |
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Definition
| market risk premium (the reward for bearing an average amount of systematic risk) |
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Term
| CAPM Equation calculates the |
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Definition
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Term
| the CAPM defines the relationship between |
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Definition
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Term
| if you know the asset's systematic risk you can use the |
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Definition
| CAPM to determine expected return (for physical or financial assets) |
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Term
| 3 factors affecting expected return |
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Definition
pure time value of money (measured by risk free rate)
reward for bearing risk (market risk premium)
amount of systematic risk for asset of interest (beta) |
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Term
| to find the expected return of the portfolio |
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Definition
either find the beta of the portfolio first and then plug into CAPM
or add each into the Er equation |
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Term
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Definition
| the correlation between the returns of an asset and the returns on the market, weighted by the ratio of how much the asset moves around and to how much the market moves |
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Term
| CAPM is a ___ type of model |
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Definition
| one period, one factor (so it's too simple) |
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Term
| the most important asset that CAPM is missing is |
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Definition
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