Week 12 part 2

Flashcards covering key concepts regarding risk, return, and estimation techniques used in finance.

Beta

A measure of the sensitivity of a stock’s return to the return of the market.

Diversifiable Risk

Firm-specific risk that can be eliminated by diversification.

Non-Diversifiable Risk

Economy-wide risk that cannot be diversified away, affecting all stocks.

CAPM

Capital Asset Pricing Model; used to determine a stock's expected return based on its beta.

Ordinary Least Squares (OLS) Regression

A method that estimates the relationships between variables by minimizing the sum of squared differences.

R-squared

A statistical measure that represents the fraction of variation in the dependent variable explained by the independent variable.

Systematic Risk

Risk factors affecting the entire market, such as recession and inflation.

Unsystematic Risk

Risk that is unique to a specific firm and can be mitigated through diversification.

Variance

A measure of the dispersion of returns, calculated as the average of the squared deviations from the mean.

Alphas (α) in CAPM

The average monthly excess return relative to the benchmark return implied by CAPM; indicates performance.

Expected Return

The return anticipated on an investment based on the risk-free rate and the stock's beta.