Risk, Markets, and Capitalization Flashcards
Expected Return
Computed by computing the product of the probability of a given event and the return in that case and adding the products in each discrete scenario.
Standard Deviation
Obtained by taking the square root of the variance. It has a more straightforward meaning than variance. It tells you that in a given year, you can expect an investment’s return to be one standard deviation above or below the average rate of return.
Variance
Used to measure the degree of risk in an investment. It is calculated by finding the average of the squared deviations from the mean rate of return.
Specific Risk
A risk inherent in a small group of assets that can be mitigated by diversifying or investing in a broad portfolio of assets; also known as unsystematic risk or diversifiable risk.
Systemic Risk
A risk that markets will experience in a downturn and all investments within that market will be negatively affected; it is difficult to reduce with diversification.
Beta (β)
A number describing the correlated volatility of an asset in relation to the volatility of the benchmark that the asset is being compared to.
Mergers and Acquisitions (M&A)
An aspect of corporate strategy, corporate finance, and management dealing with the buying, selling, dividing, and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary or other child entity or using a joint venture.
Inflation
An increase in the general level of prices or in the cost of living.
Covariance
A measure of how much two random variables change together.
Systematic Risk
A risk common to all securities that cannot be diversified away; also known as nondiversifiable risk.
Unsystematic Risk
A risk in a portfolio that can be diversified away by holding a pool of individual assets; also known as diversifiable risk.
Capital Asset Pricing Model (CAPM)
An equation that assesses the required rate of return on a given investment based upon its risk relative to a theoretical risk-free asset.
Market Risk Premium
The amount by which the expected rate of return of the exchange system exceeds the risk-free interest rate.
Risk-Free Rate
The theoretical rate of return of an investment with no risk of financial loss.
Security Market Line (SML)
The representation of the capital asset pricing model. It displays the expected rate of return of an individual security as a function of systematic, nondiversifiable risk (its beta).
Auction Market
An exchange where goods and services are offered for bids; bids are made, and then the goods and services are sold to the highest bidder.
Broker Market
An exchange where a broker brings buyers and sellers together.
Dealer Market
An exchange where institutions are assigned to a particular security and trade out of their own account.
Initial Public Offering (IPO)
A public offering where shares of stock in a company are sold to the general public on a securities exchange for the first time.
Private Placement
A funding round of securities that are sold through a private offering, mostly to a small number of chosen investors.
Secondary Market Offering
A registered offering of a large block of security that has been previously issued to the public.
Stock Repurchase
Reacquisition by a company of its own stock.
Underwriter
An entity that markets newly issued securities.
Average ROI
ROI divided by the number of years between the purchase and sale of the security.
