Risk and Diversification

Risk

Variability in returns; measured by standard deviation

Standard Deviation

Measures past return volatility of an investment

Coefficient of Variation

Relative measure of risk-vs-return relationship

Diversification

Reducing overall portfolio risk by investing in different assets

Correlation

Measurement of co-movement between two variables

Total Risk

Includes firm-specific and market risk

Modern Portfolio Theory

Concept to minimize risk by combining securities into a portfolio

Efficient Frontier

Set of all efficient portfolios achieving highest return for each risk level

Required Return

Return investors need for the risk level they take

Beta

Measurement of a company's stock sensitivity to market risk

Capital Market Efficiency

Prices fully reflect available information on each security

Weighted Average Cost of Capital (WACC)

Weighted-average after-tax cost of capital used by a firm