Term

Definition
Value created through multiplying each possible outcome by its possibility of occurrence. 


Term
Standard deviation (p.438) 

Definition
A commonly used measure of dispersion which defines the spread of outcomes around the expected value. A way to measure risk for a specific investment. 


Term
Correlation coefficient (p.441) 

Definition
A measure between the joint movement of two variables. 


Term
Efficient frontier (p.443) 

Definition
A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a given level of expected return. Portfolios that lie below this line are suboptimal, because they do not provide enough return for the level of risk. 


Term
Efficient frontier (p.443) 

Definition
A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a given level of expected return. Portfolios that lie below this line are suboptimal, because they do not provide enough return for the level of risk. 


Term
Indifference curves (p.444) 

Definition
Portrays the investor's tradeoff between risk and return. Used in conjunction with the efficient frontier to determine the optimum portfolio. 


Term
Capital Asset Pricing Model (CAPM, p.446) 

Definition
Model of valuing investments that takes off where the efficient frontier concluded through the introduction of a new investment outlet, the riskfree asset. 


Term
Capital market line (p.448) 

Definition
A line used in the capital asset pricing model to illustrate the rates of return for efficient portfolios depending on the riskfree rate of return and the level of risk (standard deviation) for a particular portfolio. 


Term

Definition
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. 


Term

Definition
The risk inherent to the entire market or entire market segment. 


Term
Unsystematic risk (p.451) 

Definition
Company or industry specific risk that is inherent in each investment. 


Term
Security market line (SML, p.451) 

Definition
A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky marketable securities. 


Term
Arbitrage pricing theory (p.462) 

Definition
An asset pricing model based on the idea that an asset's returns can be predicted using the relationship between that same asset and many common risk factors. 

