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Finance_6

Risk and Rate of Return

QuestionAnswer
Potential variability in future cash flows. The likely variability associated with revenue or income streams. Risk can be measured as the standard deviation or beta. Risk
The risk related to an investment return that can be eliminated through diversification. The result of factors that are unique to the particular firm. Company-Unique Risk (Unsystematic Risk)
Diversification
Holding Period Returns
The relationship between an investment's return and the market's returns. This a measure of the investment's nondiversifable risk. Beta
The relationship between a portfolio's returns and the market returns. It is a measure of the portfolio's nondiversifable risk. Portfolio Beta
Identifying and selecting the asset classes appropriate for a specific investment portfolio and determining the proportions of those assets within the portfolio. Asset Allocation
Minimum rate of return necessary to attract an investor to purchase or hold a security. Required Rate of Return
The additional return expected for assuming risk. Risk Premium
An equation stating that the expected rate of return on a project is a function of the risk free rate, the investment's systematic risk and the expected risk premium for the market portfolio of all risky securities. Capital Asset Pricing Model (CAPM)
The return line that reflects the attitudes of investors regarding the minimum acceptable return for a given level of systematic risk associated with a security. Security Market Line
Created by: Wilkins188