Risk and Return Flashcards
What is risk?
The possibility of earning a return that is lower than expected
What is return?
The profit or loss from an investment over a period of time
What is the Holding period return?
Total return over an investment period
What are treasury bills?
They are low risk short-term gov securities which have no default risk as they are backed by the gov. Also they have short maturities so price remains relatively stable
What are long term gov bonds?
Fixed income securities with maturities over 10 years. Long maturity means they are more at risk to interest rate changes
What are stocks?
Share ownership of corporations whose value is dependent on stock market performance. They are at higher risk than bonds due to higher volatility
What is portfolio expected return?
It is the weighted average of individual asset returns
What correlation does a risk free two -stock portfolio?
-1 and the lower the value, the lower the risk
Explain market risk vs diversifiable risk?
Market risk + diversifiable risk = Total risk. Market risk can’t be eliminated by diversification but diversifiable risk can
What does Beta and systematic risk show us?
Beta measures stock risk relative to the market. If beta > 1 then stock is more volatile than the market
What is risk premium?
The difference between a market’s expected return and the return of a risk-free asset
What is risk aversion?
If someone is risk averse then they prefer safe investments
What is risk loving?
To be risk loving a person wants high risks for a higher return
In the utility theory equation what does A represent?
A is the risk aversion coefficient and the higher that A is, the more risk-averse that the investor is
What are the risk-adjusted performance measures?
Sharpe ratio
Treynor ratio
Jensen’s Alpha
M^2
What is the Sharpe Ratio?
Measure the return per unit of total risk and the higher the ratio, the better the performance
What is the Treynor ratio?
Measures the return per unit of systematic risk
What is Jensen’s Alpha?
Measures excess return beyond CAPM. If alpha > 0, then performance outperformed expectations
What is M^2?
Adjusts Sharpe ratio for market volatility. It compares portfolio return at market risk level.
