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# Basic Finance

### Risk & Return

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) |

Created by:
grpdish