pt 3 risk and return

Flashcards covering key terms and concepts from the lecture on Capital Asset Pricing Model (CAPM) and risk assessment in finance.

Capital Asset Pricing Model (CAPM)

A model that describes the expected return for all assets based on their correlation to the market portfolio and the risk-free return.

Market Portfolio

Theoretically, it includes all risky assets available to investors; commonly proxied by the S&P 500.

Beta (β)

A measure of a stock's sensitivity to market risk, calculated by the correlation coefficient of its returns with the market's returns.

Systematic Risk

The risk inherent to the entire market or market segment, which cannot be eliminated through diversification.

Expected Return

The anticipated return on an asset, determined through models like CAPM, factoring risk free rates and market premiums.

Opportunity Cost of Capital

The return required from an investment, based on the risk profile of the project compared to CAPM.

Security Market Line (SML)

A graphical representation of the relationship between expected return and beta for assets, with the risk-free rate as the intercept.

Diversifiable Risk

Risk that can be eliminated through diversification, specific to a single asset or small group of assets.

Risk-Free Rate (RRF)

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

Cyclical Industries

Industries whose performance is closely tied to the economic cycle, often associated with higher betas.