## 34 terms

### Risk

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.

### Risk Averse

The attitude toward risk in which investors would require an increased return as compensation for an increase in risk.

### Risk Neutral

The attitude toward risk in which investors choose the investment with the higher return regardless of its risk.

### Risk Seeking

The attitude toward risk in which investors prefer investments with greater risk even if they have lower expected returns.

### Scenario Analysis

An approach for assessing risk that uses several possible alternative outcomes to obtain a sense of the variability among returns.

### Range

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.

### Bar Chart

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.

### Standard Deviation

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.

### Uncorrelated

Describes two series that lack any interaction and therefore have a correlation coefficient close to zero.

### Political Risk

Risk that arises from the possibility that a host government will take actions harmful to foreign investors or that political turmoil will endanger investments.

### Diversifiable Risk

The portion of an asset's risk that is attributable to firm-specific, random causes; can be eliminated through diversification, known as unsystematic risk.

### Nondiversifiable 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.

### Beta Coefficient

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.