Ch 8 - Risk And Its Measurements Flashcards
What is the relationship between risk and return?
The higher the risk, the higher the required return
Risk
Uncertainty associated with expected returns
What is expected return
Future return, associated with scenarios and probabilities
An estimate of future returns
What is systematic risk?
Uncertainty associated with the whole economic system
What is unsystematic risk?
Uncertainty associated with specific characteristics of a firm of a sector
Only happens to one sector/company
Diversifiable
What is sovereign risk
Risk that a government will default on its debts
What are the measures of risk?
Variability of returns (standard deviation)
Volatility of returns (beta)
What is standard deviation?
Absolute measure of risk. Measures total risk (both systematic and unsystematic)
What is beta?
Relative measure of systematic risk.
Relative to the market
Measures only systematic risk of an individual asset
What is diversification?
Unsystematic risk declines as more securities are added to the portfolio
Investing in stocks, bonds, and other assets to lower (unsystematic) risk
What is CAPM?
A model that is used in the valuation of an asset that specifies the RRR for different levels of risk
Specifies the relationship between risk and return
Return
What is earned on an investment
