Search
Browse
Create
Log in
Sign up
Log in
Sign up
Upgrade to remove ads
Only $2.99/month
Ch 5-7
STUDY
Flashcards
Learn
Write
Spell
Test
PLAY
Match
Gravity
Terms in this set (55)
holding period return (HPR)
rate of return over a given investment period
arithmetic average
the sum of returns in each period divided by the number of periods
geometric average
the single per period return that gives the same cumulative performance as the sequence of actual returns
dollar weighted average return
the internal rate of return on an investment
scenario analysis
process of devising a list of possible economic scenarios and specifying the likelihood of each one, as well as the HPR that will be realized in each case
probability distribution
List of possible outcomes with associated probabilities
expected return
the mean value of the distribution of HPR
variance
the expected value of the squared deviation from the mean
standard deviation
the square root of the variance
value at risk (VaR)
measure of downside risk. the worst loss that will be suffered with a given probability, often 5%
kurtosis
measure of the fatness of the tails of a probability distribution relative to that of a normal distribution. Indicates likelihood of extreme outcomes
skew
measure of the asymmetry of a probability distribution
risk free rate
the rate of return that can be earned with certainty
risk premium
an expected return in excess of that on risk free securities
excess return
rate of return in excess of the risk free rate
risk aversion
reluctance to accept risk
price of risk
the ratio of portfolio risk premium to variance
sharpe (or reward to volatility) ratio
ratio of portfolio risk premium to standard deviation
mean variance analysis
ranking portfolios by their sharpe ratios
inflation rate
the rate at which prices are rising, measured as the rate of increase of the CPI
nominal interest rate
the interest rate in terms of nominal (not adjusted for purchasing power) dollars
real interest rate
the excess of the interest rate over the inflation rate. The growth rate of purchasing power derived from an investment
asset allocation
portfolio choice among broad investment classes
capital allocation
the choice between risky and risk free assets
complete portfolio
the entire portfolio including risky and risk free assets
capital allocation line (CAL)
plot of risk return combinations available by varying portfolio allocation between a risk free asset and risky portfolio
passive strategy
investment policy that avoids security analysis
capital market line
the capital allocation using the market index portfolio as the risky asset
market risk, systematic risk, nondiversifiable risk
risk factors common to the whole economy
unique risk, firm-specific risk, nonsystematic risk, diversifiable risk
risk that can be eliminated by diversification
investment opportunity set
set of available portfolio risk return combinations
optimal risky portfolio
the best combination of risky assets to be mixed with safe assets to form the complete portfolio
efficient frontier
graph representing a set of portfolios that maximizes expected return at each level of portfolio risk
separation property
the property that implies portfolio choice can be separated into two independent tasks: 1) determination of the optimal risky portfolio, which is a purely technical problem and 2) the personal choice of the best mix of the risky portfolio and the risk-free asset
index model
model that relates stock returns on both a broad market index and firm- specific factors
excess return
rate of return in excess of the the risk-free rate
beta
the sensitivity of a security's returns to the market factor
firm specific or residual risk
component of return variance that is independent of the market factor
alpha
a stock's expected return beyond that induced by the market index; its expected excess return when the market's excess return is zero
security characteristic line
plot of a security's predicted excess return from the excess return of the market
information ratio
ratio of alpha to the standard deviation of the residual
active portfolio
the portfolio formed by optimally combining analyzed stocks
capital asset pricing model (CAPM)
a model that relates the required rate of return on a security to its systematic risk as measured by beta
market portfolio (M)
the portfolio for which each security is held in proportion to its total market value
mutual fund theorem
states that all investors desire the same portfolio of risky assets and can be satisfied by a single mutual find composed of that portfolio
expected return (mean return) beta relationship
implication of the CAPM that security risk premiums (expected excess returns) will be proportional to beta
security market line (SML)
graphical representation of the expected return-beta relationship of the CAPM
alpha
the abnormal rate of return on a security in excess of what would be predicted by an equilibrium model such as the CAPM
security characteristic line (SCL)
a plot of a security's expected excess return over the risk-free rate as a function of the excess return on the market
multifactor models
models of security returns that respond to several systematic factors
arbitrage
creation of riskless profits made possible by relative mispricing among securities
arbitrage pricing theory (APT)
a theory of risk-return relationships derived from no-arbitrage considerations in large capital markets
well-diversified portfolio
a portfolio sufficiently diversified that nonsystematic risk is negligible
arbitrage portfolio
a zero-net-investment, risk-free portfolio with a positive return
factor portfolio
a well-diversified portfolio constructed to have a beta of 1 on one factor and a beta of zero on any other factor
THIS SET IS OFTEN IN FOLDERS WITH...
Ch 1
81 terms
FIN 3826 - ch 1 test bank
36 terms
Chapter 13 Quiz Equity Valuation
18 terms
INVEST chapter 16
59 terms
YOU MIGHT ALSO LIKE...
Finance 5320-Chapter 6 Risk and Return
42 terms
CH 5
27 terms
FIN 330 Ch 8
19 terms
Finance Risk and return
37 terms
OTHER SETS BY THIS CREATOR
Ch 13 Equity-Final Exam
15 terms
Ch 8-11
61 terms
OTHER QUIZLET SETS
Civics Test Ch.1
24 terms
EP Test 4 Ch 15
53 terms
Spanish Grammar Test - 1
75 terms
BMS-360 Chapter 10
21 terms