Financial Mgmt: Risk & Return
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27 terms
Terms | Definitions |
|---|---|
 Risk Aversion | only taking on risk if the return is high |
| Risk | standard deviation |
| Portfolio | collection of securities or assets, reduces variability |
| Single-Stock Selection | not in portfolio, compare expected return vs StD (risk) |
| Portfolio Variance | not weighted average, combining stocks in a portfolio can reduce the variability of overall return |
| Portfolio Expected Return | weighted average of individuals asset's expected returns |
| Positively Correlated Returns | produce same result as they do individually \/\ + \/\ = \/\ |
| Negatively Correlated Returns | cancel each other out to give E(R) /\/ + \/\ = ----- |
| How Can An Investor Reduce Variance of Return? | put together stocks with different price patterns, don't pick from only one industry |
| Announcement of Earnings | expected portion (what company expects earnings to be) vs surprise portion |
| News | systematic risk vs unsystematic risk |
| Systematic Risk | news affecting entire market (GDP, economic policy). nondiversifiable |
| Unsystematic Risk | news affecting only particular firms/assets, portfolio formation reduces this. diversifiable |
| Unsystematic Risk Example | CEO gets indicted for fraud, pps will go down (volatility for that stock and that stock only) |
| Total Risk of a Stock | systematic + unsystematic risk |
| Principle of Diversification | a collection of assets can have less variability than the typical individual asset |
| Systematic Risk Principle | the reward for bearing risk depends only upon the systematic risk of an investment |
| Expected Return | risk free return + risk premium (reward for bearing systematic risk) |
| Beta Coefficient (B) | a measure of an asset's systematic risk relative to an "average risky asset" (market as a whole). no ideal B. |
| high B = _ risk and _ reward | high risk and high expected reward |
| Average Risky Asset | tends to move with market, B=1 (expected to make about what market does) |
| B=2 | asset is twice as volatile as market |
| Risk-to-Reward Ratio | risk premium per unit of systematic risk. should be the same for all assets if competitive market is in equilibrium (only systematic risk affects expected return) |
| The Security Market Line (SML) | gives the expected return/systematic risk relation of assets in a competitive, active, financial market. |
| Riskless Asset (B=?) | B=0 ex. t-bills |
| Intercept of SML | risk free return (Rf) |
| Slope of SML | market risk premium (MRP). E(Rm)-Rf Rm= Return on Maket Rf= Risk free return |
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