CFIN6 Ch 8 Risk and Rates of Return - Glossary PDF

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CFIN6 Ch 8 Risk and Rates of Return - Glossary...

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Glossary Chapter 8 beta coefficient, β A measure of the extent to which the returns on a given stock move with the stock market. capital asset pricing model (CAPM)

A model used to determine the required return on an asset, which is based on the proposition that any asset’s return should be equal to the risk–free return plus a risk premium that reflects the asset’s nondiversifiable risk.

coefficient of variation (CV)

A standardized measure of the risk per unit of return. It is calculated by dividing the standard deviation by the expected return.

correlation coefficient, ρ

A measure of the degree of relationship between two variables.

diversification

Reduction of standalone risk of an individual investment by combining it with other investments in a portfolio.

equilibrium expected rate of return,

The condition under which the expected return on a security is just equal to its required return, = r, and the price is stable. The rate of return expected to be realized from an investment; the mean value of the probability distribution of possible results.

expected return The weighted average expected return on stocks held in a portfolio. on a portfolio, firm–specific (diversifiable) risk

That part of a security’s risk associated with random outcomes generated by events or behaviors, specific to the firm. It can be eliminated by proper diversification.

market The part of a security’s risk associated with economic, or market, factors that systematically affect (nondiversifiable) most firms. It cannot be eliminated by diversification. risk market risk premium (RPM)

The additional return over the risk–free rate needed to compensate investors for assuming an average amount of risk.

probability distribution

A listing of all possible outcomes or events, with a probability (chance of occurrence) assigned to each outcome.

realized rate of return,

The return that is actually earned. The actual return ( (

) usually differs from the expected return

).

relevant risk

The portion of a security’s risk that cannot be diversified away; the security’s market risk. It reflects the security’s contribution to the risk of a portfolio.

risk

The chance that an outcome other than the expected one will occur.

risk aversion

Risk–averse investors require higher rates of return to invest in higher–risk securities.

risk premium (RP)

The portion of the expected return that can be attributed to the additional risk of an investment. It is the difference between the expected rate of return on a given risky asset and the expected rate of return on a less risky asset.

security market line (SML)

The line that shows the relationship between risk as measured by beta and the required rate of return for individual securities.

standard deviation, σ

A measure of the tightness, or variability, of a set of outcomes....