Risk and Return in Finance

These flashcards cover key concepts related to risk and return in corporate finance, focusing on expected returns, risk management, and portfolio analysis.

Expected Returns

Returns based on the probabilities of possible outcomes.

Diversification

A strategy that reduces risk without an equivalent reduction in expected returns by offsetting worse-than-expected returns from one asset with better-than-expected returns from another.

Systematic Risk

Market risk that affects a large number of assets and cannot be eliminated through diversification.

Unsystematic Risk

Risk that affects a limited number of assets and can be eliminated by diversifying a portfolio.

Variance

A measure of the volatility of returns calculated as the weighted average of squared deviations.

Standard Deviation

The square root of variance, representing the total risk of an asset.

Portfolio

A collection of assets whose risk and return are combined to assess overall investment performance.

Beta Coefficient (β)

A measure of a stock's volatility relative to the market, indicating its systematic risk.

Security Market Line (SML)

Graphical representation of the Capital Asset Pricing Model (CAPM) showing the relationship between systematic risk and expected return.

Market Risk Premium

The additional return expected from holding a risky asset over the risk-free rate.