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Chapter 11 - Risk and Diversification
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Terms in this set (13)
Portfolio
a combined holding of at least two assets.
Uncertainty
the inability to forecast which outcomes or states of nature will occur in the future.
Risk
the variation in value among uncertain outcomes.
Risk-Averse
unwilling to accept risk without the expectation of reward.
Random Variable
in finance, a variable whose value in the future is unknown.
Normal Distribution
a probability distribution with a symmetrical or bell-like curve.
Mean or Expected Value
the average of all possibly values weighted by their probabilities of occurrence.
Standard Deviation and Variance
statistical measures of dispersion and variability.
Diversification
the reduction in a portfolio's risk that occurs when assets are combined into a portfolio and portions of the risks of the portfolio's constituent assets cancel each other out.
Covarience
a statistical measure of the extent to which two variables move together.
Correlation Coefficient
a statistical measure of the extent to which two variables move together. The correlation coefficient ranges from +1, or perfect positive correlation, to -1 or perfect negative correlation.
Diversifiable Risk
the risk that can be removed through diversification.
Nondiversifiable Risk
the risk remaining even after assets are combined in a well-diversified portfolio. Also known as systematic risk or market risk.
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