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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
Beat < 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, firm specific)
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)
Capital Asset Pricing Model
defines relationship between risk & return
Portfolio
a collection of assets
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
Risk Premium =
expected return - risk free rate
Risk-Free Rate
interest rate of short-term government bonds
Efficient Market Hypothesis
EMH
Strong Form Efficiency
prices reflect ALL info (public & private)
Semi-strong Form Efficiency
prices reflect PUBLIC info
Weak Form Efficiency
prices reflect PAST market info (price & volume)


 

 

 
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