Risk and Capital Asset Pricing Model (CAPM) Flashcards
Risk that cannot be diversified away
Market Risk
The potential of having prices of a particular security move in the direction opposite of the investors’ expectations
Risk
A measure of systematic risk for a particular security that quantifies the security’s price sensitivity to price changes in the market
Beta
The measure of the width of the distribution or historical deviation away from the mean
Standard Deviation
The process of valuing assets
Asset Pricing
An index managed by Standard and Poor’s that is deigned to approximate the total stock market
S&P 500
This is often used as a benchmark to understand how the stock market performed overall
S&P 500
Market-wide risk or the portion of risk that is not diversifiable
Systematic Risk AKA Market Risk
The smaller the deviation
the more predictable the result
The standard deviation is used to calculate the
Beta coefficient
This indicates the volatility of the stock
Beta Coefficient
The weighted average of security returns across different economic states, where the weights are the probabilities of the different economic states
Expected Return
The process of spreading risk across multiple assets
Diversification
Decreasing risk by combining assets that are not perfectly correlated, thus spreading the risk out
Diversification
Firm-specific risk or the portion of risk that is diversifiable
Idiosyncratic Risk aka Unsystematic Risk
