Intermediate Investments Chapter 6 Book Vocab

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17 Terms

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Market, Systematic, Nondiversifiable Risk
Risk factors common to the whole economy.
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unique risk, firm-specific risk, unsystematic risk, diversifiable risk
Risk that can be eliminated by diversification.
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Variance
The probability-weighted average of the squared deviations of actual returns from the expected return.
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Correlation Coefficient
The covariance divided by the product of the standard deviations of the returns on each fund.
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Investment Opportunity Set
Set of available portfolio risk-return combinations.
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Optimal Risky Portfolio
The best combination of risky assets to be mixed with safe assets when forming the complete portfolio.
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Risk Premium
Expected excess return over the risk-free rate.
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The slope of the CAL
Sharpe Ratio
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Efficient Frontier
Graph representing a set of portfolios that maximizes expected return at each level of portfolio volatility.
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Separation Property
The property that implies portfolio choice can be separated into two independent tasks
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Index Model
Model that relates stock returns to returns on both a broad market index and firm-specific factors.
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Alpha
The expected rate of return on a security in excess of what would be predicted by an equilibrium model such as the CAPM.
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Beta
The sensitivity of a security’s return to the return on the market index.
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Beta measures
Systematic risk
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Firm-specific (or residual) risk
Component of return variance that is independent of the market factor.
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Security Characteristic Line (SCL)
Plot of a security’s predicted excess return given the excess return of the market.
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Risk Pooling
Pooling together many independent sources of risk

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