3 Flashcards
(31 cards)
Term
Definition
What is return in finance?
The gain or loss from an investment, often measured as a percentage.
What is the risk-return tradeoff?
The principle that higher returns are associated with higher risk.
What are cash returns vs percentage returns?
Cash returns are in monetary terms, percentage returns express gain/loss as a percentage of investment.
What is the equity risk premium?
The excess return that investing in the stock market provides over a risk-free rate.
What is used as the risk-free asset?
Government Treasury bills.
What is variance?
The average squared deviation from the mean return.
What is standard deviation?
The square root of variance; a measure of investment risk.
How is mean return calculated?
Mean = (R1 + R2 + … + RT) / T
What is the arithmetic average return?
The return earned in an average year over a multiyear period.
What is the geometric average return?
The average compound return earned per year over a multiyear period.
What is an efficient capital market?
A market where security prices reflect all available information.
What is the Efficient Markets Hypothesis (EMH)?
The idea that actual markets reflect all available information.
What are weak-form efficient markets?
Markets where prices reflect past trading data.
What are semi-strong-form efficient markets?
Markets where prices reflect all publicly available information.
What are strong-form efficient markets?
Markets where prices reflect all information, public and private.
What is expected return?
The weighted average of possible returns based on probabilities.
What is portfolio?
A group of assets held by an investor.
What is portfolio weight?
The proportion of the portfolio’s total value invested in a particular asset.
How is expected return of a portfolio calculated?
Weighted average of individual asset returns.
What is systematic risk?
Market-wide risk that affects all investments (non-diversifiable).
What is unsystematic risk?
Asset-specific risk that can be eliminated by diversification.
What does diversification do?
Reduces unsystematic risk by spreading investments.
