ch.13

Flashcards for key concepts from the chapter on Return, Risk, and the Security Market Line.

Expected Return

The return on a risky asset expected in the future.

Portfolio

A group of assets such as stocks and bonds held by an investor.

Systematic Risk

Market risk that influences many assets, such as uncertainties about economic conditions.

Unsystematic Risk

Unique or asset-specific risk that affects at most a small number of assets.

Expected Risk Premium

The difference between the expected return on a risky investment and the certain return on a risk-free investment.

Diversification

The practice of spreading investments across various financial assets to reduce risk.

Beta Coefficient (β)

A measure of systematic risk; an asset's sensitivity to market movements.

Security Market Line (SML)

A graphical representation of the relationship between expected return and beta.

Capital Asset Pricing Model (CAPM)

An equation that describes the relationship between expected return and systematic risk.

Maximum Risk

The level of risk that cannot be eliminated through diversification.

Standard Deviation

A statistical measure that quantifies the amount of variation or dispersion of a set of values.

Variance

The expectation of the squared deviation of a random variable from its mean, indicating risk.

Risk-Free Rate (Rf)

The return on an investment with zero risk, typically represented by government bonds.

Net Present Value (NPV)

A method used to evaluate the profitability of an investment by comparing expected returns to the costs.