Risk, Diversification, and Asset Valuation

Flashcards covering key vocabulary from a lecture on risk, diversification, stock valuation, and efficient markets.

Standard Deviation

A statistical measure that quantifies a variable's volatility in the marketplace.

Volatility

The extent to which an asset's price or return is likely to fluctuate.

Diversification

Reducing risk by investing in a variety of assets whose returns are not strongly related.

Firm-Specific Risk

Risk that affects only a single company or a small group of companies.

Market Risk

Risk that affects all companies in the stock market.

Risk-Return Tradeoff

The principle that riskier assets pay a higher return on average to compensate investors for the extra risk.

Asset Valuation

The process of determining the fair price or worth of an asset.

Fundamental Analysis

A method of valuing a company by analyzing its financial statements and future prospects.

Efficient Markets Hypothesis (EMH)

The theory that asset prices reflect all publicly available information about the value of the asset.

Informationally Efficient

stock prices reflect pretty much all available information.

Random Walk

The idea that stock price changes are unpredictable and follow no discernible pattern.

Index Fund

A mutual fund that aims to mirror the performance of a specific market index.

Actively Managed Mutual Fund

A mutual fund where managers actively select investments with the goal of outperforming the market.

Bubble

A market situation where asset prices rise far above their fundamental values, often driven by speculation and exuberance.