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) |