FNCE chapter 8 - Risk and return Flashcards
risk
the chance that an unexpected outcome will occur
probability distribution
a listing of all possible outcomes with a probability assigned to each
coefficient or variation
calculated as the standard deviation divided by the expected return
risk premium
the portion of the expected return that can be attributed to an investments riskiness
the correlation coefficient, p
measures the degree of relationship between two variables
risk reduction
combining stocks that are not perfectly correlated will reduce the portfolio risk through diversification
risk aversion
risk-adverse investors require higher rates of return to invest in higher-risk countries
risk premium
the portion of the expected return that can be attributed to the additional risk of an investment
diversification
reduction of stand-alone risk of an individual investment by combining it with other investments in a portfolio
security market line (SML)
the line that shows the relationship between risk as measured by beta and the required rate of return for individual securities
beta coefficient, B
a measure of the extent to which the returns on a given stock move with the stock market
capital asset pricing model (CAPM)
a model used to determine the required return on an asset
beta risk of a stock is affected by
composition of its assets
use of debt financing
increased competition
expiration of patents
systematic risks
interest rates
inflation
maturity
liquidity
unsystematic rates
business
financial
default
