| 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) |
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