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