Risk and Diversification
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12 Terms
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
