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32 Cards in this Set
- Front
- Back
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Holding Period Return
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the rate of return earned on an investment, which equals the dollar gain divided by the amount invested
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Expected Rate of Return
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the average of all possible outcomes where those outcomes are weighted by the probability that each will occur
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What is risk?
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variability in future cash flows
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What is standard deviation?
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statistical measure of the spread of probability distribution .
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What is company unique risk/unsystematic/diversifiable risk?
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the risk related to an investment return that can be eliminated through diversification.
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What is systematic risk?
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the risk related to an investment that cannot be eliminated through diversification
Called market risk and nondiversiable risk |
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What is a characteristic line?
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the line of best fit through a series of returns for a firms stock relative to the markets returns
Slope of the line = beta |
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What is a beta?
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is the relationship between an investments returns and the markets returns
-measure of the investments nondiversible risk |
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What is a portfolio beta?
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the relationship between a portfolio's return and the market returns. It is a measure of the portfolios nondiversiable risk
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What is asset allocation?
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identifying and selecting the asset classes appropriate for a specific investment portfolio and determining the proportions of those assets within the portfolio
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What is required rate of return?
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minimum rate of return necessary to attract an investor to purchases or hold a security
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What is the risk free rate of return?
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rate of return on risk free investments
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What is the risk premium?
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the additional return expected for assuming risk
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What is the capital asset pricing model?
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an equation stating that the expected rate of return on a projet is a function of the risk free rate and the systematic risk and the expected risk premium for the market portfolio
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What is the security market line?
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the return line that reflects the attitudes of investors regarding the minimum acceptable return for a given level of systematic risk associated with a security
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Cash Flows
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are the relevant measure of returns
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How to quantify the measure of risk?
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-use standard deviation
-higher the standard deviation the more uncertain the risk or higher the risk |
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How do you choose which investment you would like to make based on the standard deviation?
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It is up to the user. Compare the standard deviations and the expected return rates.
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What doe most stocks have betas between?
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.60 and 1.60
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What does stock with a beta of 1 indicate?
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Systemisc or market risk equal to the typical stock
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What does a stock with a beta of 0 indicate?
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No systematic risk
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What is asset allocation?
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Diversifying between a portfolio of stocks and a portfolio of bonds
-The market rewards the patient investor |
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What is used as a practical approach to measure a investors required rate of return?
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Capital Asset Pricing Model
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What is the graphical representation of the CAPM?
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Security Market Line
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Diver/Company/Unsystematic Risk
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What represents about 60% of total risk and can be eliminated?
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NonDiversifiable/Market/Systematic Risk
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What represents 40% of total risk and is relevent risk?
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60% of total risk by combing 20 or stocks together
Remaining is known as market risk |
What is composed in a diversified portfolio?
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Combine stocks that are negatively correlated to each other that is when one moves up in response the other moves down or low postive correlation
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How does combining assets in a portfolio decrease risk?
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moves less than the market
more than the market |
What does a beta less than 1 mean and a beta more than 1 mea?
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Look at standard deviation
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What do you look at for total risk?
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Look at Beta
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What do you look at for market risk?
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Market Forces and Supply and Demand
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What can we only expect to learn from the SML?
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