Risk, Return, and the CAPM Flashcards
This deck only covers KEY definitions. Read Notion for key concepts, maths, and theories.
Define dollar return.
The amount of profit or loss from an investment, denoted in dollars.
Define percentage return.
The dollar return characterised as a percentage of money invested.
What is the use of average returns?
Summarises the past performance of an investment, allowing us to see performance over time.
What is the coefficient of variation?
The amount of risk per unit of return.
What is the information ratio?
The mean return over the standard deviation of the returns (inverse of CoV).
What is the sharpe ratio?
The excess return on an asset over a period of time divided by the standard deviation of the excess returns.
Define a portfolio.
A combination of investment assets held by an investor.
What is diversification?
The process of putting money into different types of investments for the purpose of reducing overall risk of the portfolio.
Define firm specific risk.
The portion of total risk that is attributed to firm or industry factors.
Define market risk.
The portion of total risk that is attributable to overall economic factors.
Define required return.
The return that investors demand for the level of risk taken.
Define risk premium.
The reward investors require for taking risk over and above the risk free return.
Define market risk premium.
The reward for taking systematic stock market risk (the return on the market minus the risk free return).
What is beta used in calculations for?
Measures the sensitivity of a stock or portfolio to market risk.
What does the security market line show?
The relationship between risk and return for any stock or portfolio, where risk is characterised by beta.
