A measure of the uncertainty surrounding the return that an investment will earn or, more formally, the variability of returns associated with a given asset.
Total Rate of Return
The total gain or loss experienced on an investment over a given period of time.
The attitude toward risk in which investors would require an increased return as compensation for an increase in risk.
The attitude toward risk in which investors choose the investment with the higher return regardless of its risk.
The attitude toward risk in which investors prefer investments with greater risk even if they have lower expected returns.
An approach for assessing risk that uses several possible alternative outcomes to obtain a sense of the variability among returns.
A measure of an asset's risk, which is found by subtracting the return associated with the pessimistic outcome from the return associated with the optimistic outcome.
The simplest type of probability distribution; shows only a limited number of outcomes and associated probabilities for a given event.
Continuous Probability Distribution
A probability distribution showing all the possible outcomes and associated probabilities for a given event.
The most common statistical indicator of an asset's risk; it measures the dispersion around the expected value.
Normal Probability Distribution
A symmetrical probability distribution whose shape resembles a "bell-shaped" curve.
Coefficient of Variation
A measure of relative dispersion that is useful in comparing the risks of assets with differing expected returns.
Perfectly Positively Correlated
Describes two positively correlated series that have a correlation coefficient of +1.
Perfectly Negatively Correlated
Describes two negatively correlated series that have a correlation coefficient of -1.
Describes two series that lack any interaction and therefore have a correlation coefficient close to zero.
Risk that arises from the possibility that a host government will take actions harmful to foreign investors or that political turmoil will endanger investments.
The portion of an asset's risk that is attributable to firm-specific, random causes; can be eliminated through diversification, known as unsystematic risk.
The relevant portion of an asset's risk attributable to market factors that affect all firms; cannot be eliminated through diversification, known as systematic risk.
A relative measure of nondiversifiable risk. An index of the degree of movement of an asset's return in response to a change in the market return.
Risk-Free Rate of Return
The required return on a risk-free asset, typically a 3-month U.S. Treasury bill.
U.S. Treasury Bills (T-Bills)
Short-term IOUs issued by the U.S. Treasury; considered the risk-free asset.