Embed Code - If you would like this activity on your web page, copy the script below and paste it into your web page.

Normal Size Small Size show me how

Normal Size Small Size show me how

# Basic Finance

### Risk & Return

Term | Definition |
---|---|

Expected Return | weighted avg of all possible returns, weighted by probability that each return will occur |

Required return | min return necessary to attract investor to buy/hold security |

Standard Deviation | measures return volatility, measure dispersion of possible outcomes (square root of the variance) |

Beta Coefficient | measures asset’s systematic risk, how individual stock’s returns vary w/ market returns |

Beta = 1 | asset has SAME systematic risk as overall market |

Beta > 1 | asset has MORE systematic risk than overall market |

Beta < 1 | asset has LESS systematic risk than overall market |

Variance | (measures volatility) avg squared deviation between actual returns & avg return (sigma squared) |

Systematic Risk | risk affects large number (non-diversifiable, market risk) |

Unsystematic Risk | risk affects small number (diversifiable, unique, idiosyncratic) |

Diversification | assets combined to cancel out unsystematic risks, (from diff sectors) |

Total Risk = | systematic risk + unsystematic risk |

Security Market Line | representation of market equilibrium between risk & return |

SML slope | market risk premium (reward-to-risk ratio) |

CAPM | defines relationship between risk & return (Capital Asset Pricing Model) |

Historical Variance | sum squared dev from mean / (number of observations - 1) |

Total dollar return = | investment income + capital gain (or loss) due to price change |

Dividend Yield = | income / beginning price |

Capital Gains Yield = | (end price - begin price)/ begin price |

Total Percentage Return = | Dividend Yield + Capital Gains Yield |

Capital Asset Pricing Model | defines relationship between risk & return |

Risk Premium = | expected return - risk free rate |

Risk-Free Rate | interest rate of short-term government bonds |

EMH | Efficient Market Hypothesis |

Strong Form Efficiency | prices reflect ALL info (public & private) |

Semi-Strong Form Efficiency | prices reflect PUBLIC info |

Weak Form Efficiency | reflect PAST market info (price & volume) |

Created by:
grpdish
on 2006-10-22