Term
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Definition
| uncertainty related to potential loss or profit; SD of returns; the dispersion or spread of possible outcomes |
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Term
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Definition
| any return made in excess of the risk free rate; return associated with the increased level of risk of an investment |
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Definition
| (W1SD1)^2 + (W2SD@)^2 + 2W1W2Cov(1,2) |
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Term
| Risk for a portfolio asseses what? |
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Definition
| whether the securities within the portfolio are moving in the same direction and at the same rate. |
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Term
| What does Co-variance tell us? |
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Definition
| how the securities act in relation to one another |
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Term
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Definition
SUMATION of Pr(i)(X1-Xbar)(Y1-Ybar)
or SDxSDyCorrelation(1,2) |
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Term
| What doesn correlation measure? |
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Definition
| How well diversified a portfolio is |
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Term
| What does not effect E(Rp)? |
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Definition
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Term
| Any risk above market risk is considered? |
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Definition
| firm, unsystematic, unique, or diversifiable risk |
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Term
| Synonyms for Market Risk: |
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Definition
| Systematic, non-diversifiable |
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Term
| How do portfolio managers make money? |
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Definition
| By taking on market risk; identifying which macro-economic factors effect the stocks within the portfolio and to what extent they effect thier rates. |
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Term
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Definition
| measures systematic risk; measures the sensitivity of a stock's return to the retun on the market portfolio |
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Term
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Definition
Cov(i,m)/Var(m)
or
SD(p)*Corr(p,m)/SD(m) |
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Term
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Definition
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Term
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Definition
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Term
| Securities that are valued above the SML are what? |
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Definition
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Term
| Where should all securities fall in a well diversified portfolio? |
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Definition
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Term
| What is the only factor that effects the R(p) or R(i)? |
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Definition
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Term
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Definition
| although it provides more factors to CAPM it doesnt tell what the factors are |
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Term
| Portfolio returns are affected by? |
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Definition
| individual stocks weights and expected returns |
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Term
| Portfolio risk is affected by? |
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Definition
| individual stock's weights, risks, and correlation |
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Term
| synonym for perfect negative correlation: |
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Definition
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Term
| "high-risk" stock refers to what? |
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Definition
| the extent to which it makes an above average contribution to the risk of the portfolio |
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Term
| What provides the most amount of diversification away from firm specific risk? |
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Definition
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Term
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Definition
| determine opportunity cost of capital, rate of investment, beta of investmet, etc... |
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Term
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Definition
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Term
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Definition
| how much more money you will have at the end of the year if you invest today |
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Term
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Definition
| how much more you will be able to buy with your money at the the end of the year |
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Term
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Definition
| measure of the investment performance of the overall market; sumarizes the return of differnt classes of securities |
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Term
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Definition
| index of the investment performance of a portfolio of 30 "blue-chip" stocks; far from best measure of the performance of the stock market |
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Term
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Definition
| index of the investment performance of a portfolio of 500 large stocks |
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Term
| Characteristics of the S&P 500 |
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Definition
| more comprehensive than the Dow; measures the average performance of investors in the 500 firms; "success" is measured by beating the 500 |
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Term
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Definition
| extra average return from investing in long-versus short-term treasuries |
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Term
| Average market risk premium: |
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Definition
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Term
| Opportunity Cost of Capital |
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Definition
| return that a firm's shareholders are giving up by investing in the project rather than in comparable risk alternatives |
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Term
| What do investors expect compesation for? |
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Definition
| waiting(time value of money) and worrying (risk) |
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Term
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Definition
| average value of squared deviations from the mean. A measure of volatility. |
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Term
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Definition
| Strategy designed to reduce risk by spreading the portfolio across many investments |
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Term
| What does diversificaion do? |
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Definition
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Term
| Why does portfolio diversification work? |
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Definition
| because prices of differnt stocks do not move exactly together. |
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Definition
| do well when the economy does well |
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Term
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Definition
| do well when other fimrs do poorly |
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Term
| negative-risk asset does what? |
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Definition
| reduces the volatility of returns |
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Term
| are well diversified portfolios subject to market risk? |
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Definition
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Term
| Which risks affect cost of capital? |
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Definition
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Term
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Definition
| portfolio of all assets in the economy; usually a brod market index like the 500 |
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Term
| What is the average beta of all stocks? |
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Definition
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Term
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Definition
| theory of the relationsip between risk and return which states that the expected risk premium on any security equals its beta times the market risk-premium |
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Term
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Definition
| that the stock market is dominated by well-diversified investors who are concerned only with market risk. |
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Term
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Definition
| relatiohsip between expected return and beta; shows how expected rate of return depends on beta |
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Term
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Definition
| expected rate of return demanded by investors in a company, determined by the average risk of the company's securities. |
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Term
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Definition
| minimum acceptable expected rate of return on a project given its risk; depends on the risk of the project not the company |
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Term
| what does CAPM state that the expected risk premium be proportional to? |
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Definition
| both its beta and the market risk premium |
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Term
| What should cash-flow forcasts include? |
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Definition
| chances of plesant and unpleasant surprises. |
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Term
| How should potential bad outcomes be reflected? |
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Definition
| in the discount rate only to the extent that they affect beta |
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