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FIN 3000: Chapter 9 - Characterizing Risk and Return

Terms in this set (18)

If you want the chance of earning higher returns, it requires that you take on...
Higher risk investments
There is a ___ relationship between risk and return
Positive
Returns across different investments are more easily compares because they are ___.
Standardized
Historically, ___ have outperformed ___ and cash on an average-return basis
Stocks; bonds
Average returns not accurate picture of ___.
Annual returns
Standard deviation measures
volatility
Standard deviation represents the...
total risk of a security or portfolio
The larger the standard deviation...
the higher the risk
coefficient of variation
a relative measure of the relationship between risk and return
Modern Portfolio Theory
a concept and procedure for combining securities into a portfolio to minimize risk

Diversification
Portfolio return
Two main components of total risk
Firm specific risk and market risk
Firm-specific risk is referred to as
diversifiable risk
Market Risk is ___.
Non-diversifiable risk

This risk applies across all securities in any given market
Optimal Portfolio
combination of securities that produce the highest return for the amount of risk taken
With perfect positive correlation...
diversification does not effect risk
Correlation measures
the tendency of two assets to move together
Perfect positive correlation
+1

returns from two stocks are perfectly in sync

gives no risk reduction
Perfect Negative Correlation
-1.0

returns from two stocks move exactly opposite
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