Term
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Definition
| Value created through multiplying each possible outcome by its possibility of occurrence. |
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Term
| Standard deviation (p.438) |
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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. |
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Term
| Correlation coefficient (p.441) |
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Definition
| A measure between the joint movement of two variables. |
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Term
| Efficient frontier (p.443) |
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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 sub-optimal, because they do not provide enough return for the level of risk. |
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Term
| Efficient frontier (p.443) |
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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 sub-optimal, because they do not provide enough return for the level of risk. |
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Term
| Indifference curves (p.444) |
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Definition
| Portrays the investor's trade-off between risk and return. Used in conjunction with the efficient frontier to determine the optimum portfolio. |
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Term
| Capital Asset Pricing Model (CAPM, p.446) |
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Definition
| Model of valuing investments that takes off where the efficient frontier concluded through the introduction of a new investment outlet, the risk-free asset. |
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Term
| Capital market line (p.448) |
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Definition
| A line used in the capital asset pricing model to illustrate the rates of return for efficient portfolios depending on the risk-free rate of return and the level of risk (standard deviation) for a particular portfolio. |
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Term
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Definition
| A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. |
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Term
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Definition
| The risk inherent to the entire market or entire market segment. |
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Term
| Unsystematic risk (p.451) |
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Definition
| Company or industry specific risk that is inherent in each investment. |
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Term
| Security market line (SML, p.451) |
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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. |
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Term
| Arbitrage pricing theory (p.462) |
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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. |
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