| 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) |
