Term
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Definition
| The chance that some unfavorable event will occur. |
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Term
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Definition
| The risk an investor would face if he or she held only one asset. |
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Term
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Definition
| A listing of possible outcomes or events with a probability (chance of occurrence) assigned to each outcome. |
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Term
| Expected Rate of Return, (r hat) |
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Definition
| The rate of return expected to be realized from an investment; the weighted average of the probability distribution of possible results. |
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Term
| Standard Deviation, (sigma) |
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Definition
| A statistical measure of the variability of a set of observations. |
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Term
| Coefficient of Variation, (CV) |
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Definition
| The standardized measure of the risk per unit of return; calculated as the standard deviation divided by the expected return. |
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Term
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Definition
| Risk-averse investors dislike risk and require higher rates of return as an inducement to buy riskier securities. |
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Term
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Definition
| The difference between the expected rate of return on a given risky asset and that on a less risky asset. |
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Term
| Capital Asset Pricing Model (CAPM) |
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Definition
| A model based on the proposition than 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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Term
| Expected Return on a Portfolio, (r hat p) |
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Definition
| The weighted average of the expected returns on the assets held in the portfolio. |
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Term
| Realized Rate of Return, (r bar) |
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Definition
| The return that was actually earned during some past period. The actual return (r bar) usually turns out to be different from the expected return (r hat) except for riskless assets. |
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Term
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Definition
| The tendency of two variables to move together. |
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Term
| Correlation Coefficient, (p) |
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Definition
| A measure of the degree of relationship between two variables. |
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Term
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Definition
| That part of a security's risk associated with random events; it can be eliminated by proper diversification. This risk is also known as company-specific, or unsystematic, risk. |
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Term
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Definition
| The risk that remains in a portfolio after diversification has eliminated all company-specific risk. This risk is also known as non-diversifiable or systematic or beta risk. |
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Term
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Definition
| The risk that remains once a stock is in a diversified portfolio is its contribution to the portfolio's market risk. It is measured by the extent to which the stock moves up or down with the market. |
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Term
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Definition
| A portfolio consisting of all stocks. |
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Term
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Definition
| A metric that shows that extent to which a given stock's returns move up and down with the stock market. Beta thus measures market risk. |
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Term
| Average Stock's Beta, (b A) |
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Definition
| By definition, b A = 1 because an average-risk stock is one that tends to move up and down in step with the general market. |
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Term
| Market Risk Premium, RP M |
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Definition
| The additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk. |
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Term
| Security Market Line (SML) Equation |
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Definition
| 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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