Final Fine'3010

Why are stock & bond markets useful tools for discussing required returns and risk?

Next best investment with similar risk and info/data plentiful

Is percent return or dollar return better?

Percent Return b/c no matter how much you bought, the return percent is the same

What is a conjecture?

All investments must fall on the line connecting the risk free asset(t bill) and the market portfolio(s&p500)

What is actual return (ex-post)

A reflection of how well the firm has done (the price moves reflect changes in firm value)

What is Expected returns (ex-ante)

A reflection of how much risk is involved with investing in question

What does total risk include?

Unique (diversifiable) Risk & market (undiversifiable) Risk

What is a unique risk?

This type of risk is unsystematic/firm specific risk (a CEO runs off with the assets of the firm)

What is a market risk?

This is a systematic risk, so you cannot avoid, no matter how many stocks u add to your portfolio, can be rewarding. (interest rate changes, change in consumer confidence, or national crisis)

The dollar could have been invested in several different asset types:

Treasury bills, long term treasury bonds, large common stock or small common stocks

What is market portfolio?

Being able to own one of everything using s&p 500

What is the beta for the S&P 500 if we use this as proxy fort the market?

1, which equals to the average market risk

what is Beta

This is a measurement of an investments sensitivity to market risk