Portfolio Risk & Return: Part 1 Flashcards
What is an “Efficient Market”?
A market in which asset prices reflect new information quickly and rationally.
What is a “risk premium”?
An extra return expected by investors for bearing some specified risk.
What is a “Normal Distribution”?
A continuous, symmetric probability distribution that is completely described by its mean and variance.
[With respect to a company]
What does liquidity refer to?
The extent to which a company is able to meet its short-term obligations using cash flows and those assets that can be readily transformed into cash.
What is “Risk Aversion”?
The degree of an investor’s unwillingness to take risk; the inverse of risk tolerance.
What does “Risk Averse” mean?
The assumption that an investor will choose the least risky alternative.
What does “Risk Tolerance” refer to?
The amount of risk an investor is willing and able to bear to achieve an investment goal.
What is the “indifference curve”?
A curve representing all the combinations of two goods or attributes such that the consumer is entirely indifferent among them.
What is the “Capital Allocation Line”?
A graph line that describes the combinations of expected return and standard deviation of return to an investor from combining the optional portfolio of risky assets with a risk-free asset.
What is a correlation coefficient?
A number between -1 and +1 that measures the consistence or tendency for two investments to act in a similar way.
What is a “Minimum Variance Portfolio”?
The portfolio with the minimum variance for each given level of expected return.
What is the “Global minimum-variance portfolio”?
The portfolio on the minimum-variance frontier with the smallest variance of return.
What is the “Markowitz efficient frontier’?
The graph of the set of portfolios offering the maximum expected return for their level of risk, as measured by standard deviation of return.
What is the “Two-fund separation theorem”?
The theory that all investors, regardless of taste, risk preferences, and initial wealth, will hold a combination of two portfolios of funds: a risk-free asset and an optimal portfolio of risky assets.
