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Flashcards in Chapter 6 Deck (15):
1

holding-period return

the rate of return earned on an investment

2

expected rate of return

average of the possible rates of return

3

risk

- potential variability in future cash flows
- the wider the range of possible future events that can occur, the greater the risk

4

standard deviation

measure of risk (high standard deviation = high risk)

5

portfolio

refers to combining several assets

6

total risk of portfolio is due to two types of risk:

1. systematic (or market risk): is risk that affects all firms
2. unsystematic (or company unique risk): is risk that affects only a specific firm

7

characteristic line

line of best fit

8

beta

the risk that remains for a company even after we have diversified our portfolio

9

beta 0,1)

beta = 0 then no systematic risk
beta = 1 systematic risk equal to the typical stock in the marketplace
beta > 1 has systematic risk greater than the typical stock

10

asset allocation

moving from an all stock portfolio to a mixture of stocks and bonds and finally to an all bond portfolio
reduces variability of returns and rates of return

11

required rate of return

minimum rate of return necessary to attract an investor to purchase or hold a security

12

risk free rate of return

required rate of return for risk-less investments

13

risk premium

additional return we must expect to receive for assuming risk

14

Capital asset pricing model

relationship between risk and expected return

15

security market line

line that shows appropriate required rate of return given a stocks systematic risk