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FIN 330 Ch 8
Terms in this set (19)
The chance that an outcome other than the expected one will occur.
A listing of all possible outcomes or events, with a probability assigned to each outcome.
Expected Rate of Return
The rate of return expected to be realized from an investment, which is the mean value of the probability distribution of possible results.
A measure of the tightness, or variability, of a set of outcomes.
Coefficient of Variation
A standardized measure of the risk per unit of return, it is calculated by dividing the standard deviation by the expected return.
Risk-averse investors require higher rates of return to invest in higher-risk securities.
The portion of the expected return that can be attributed to the additional risk of an investment. It is the difference between the expected rate of return on a given risky asset and the expected rate of return on a less risky asset.
Expected Return on a Portfolio
The weighted average of the expected returns on stocks held in a portfolio.
Realized Rate of Return
The return that is actually earned. The actual return usually differs from the expected return.
Reduction of stand-alone risk of an individual investment by combining it with other investments in a portfolio.
A measure of the degree of relationship between two variables.
That part of a security's risk associated with random outcomes generated by events or behaviors, specific to the firm. It can be eliminated by proper diversification.
The part of a security's risk associated with economic, or market, factors that systematically affect all firms to some extent. It can't be eliminated by diversification.
The portion of a security's risk that can't be diversified away; the security's market risk. It reflects the security's contribution to the risk of a portfolio.
A measure of the extent to which the returns on a given stock move with the stock market.
Capital Asset Pricing Model
A model used to determine the required return on an asset, which is based on the proposition that an asset's return should be equal to the risk-free return plus a risk premium that reflects the asset's nondiversifiable risk.
Security Market Line
The line that shows the relationship between risk as measured by beta and the required rate of return for individual securities.
Market Risk Premium
The additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk.
The condition under which the expected return on a security is just equal to its required return, and the price is stable.
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