8. Risk & Return pt 2 Flashcards
What is an expected return?
return on a risky asset expected in the future
What is a portfolio?
Group of assets, such as shares and debentures, held by an investor
What is the portfolio weight?
The percentage of a portfolio’s total value in a particular asset
What is systematic risk?
A risk that influences a large number of assets. Also market risk
What is non-systematic risk?
A risk that affects at most a small number of assets. Also unique or asset-specific risk
What is principle of diversification?
Principle stating that spreading an investment across a number of assets will eliminate some, but not all of the risk
What is systematic risk principle?
Principle stating that the expected return on a risky asset depends only on that asset’s systematic risk
What is beta coefficient?
Amount of systematic risk present in a particular risky asset relative to an average risky asset
What is security market line (SML)?
Positively sloped straight line displaying the relationship between expected return and beta
What is market risk premium?
Slope of the SML, the difference between the expected return on a market portfolio and the risk-free rate
What is capital asset pricing model (CAPM)
Equation of the SML showing the relationship between expected return and beta
What is systematic risk?
Is the covariance risk
What is beta?
Systematic risk divided by the standard deviation of return on the market
What is efficient portfolios?
Fully diversified portfolios only have systematic risk
What is the SML equation?
It explains the expected return for all assets
