Business Finance Chapter 12 BOOK

Flashcards covering key concepts related to finance, diversification, investment strategies, and portfolio theory.

Diversification

The process of investing funds across several assets which leads to reduced risk.

Modern Portfolio Theory (MPT)

A theory that suggests how investors can construct portfolios to maximize expected return based on a given level of market risk.

Correlation

A statistical measure that indicates the extent to which two or more variables fluctuate together.

Long Position

An investment strategy where an investor buys a security with the expectation that it will increase in value.

Short Position

An investment strategy where an investor sells a borrowed security with the expectation of buying it back at a lower price.

Risk Reduction

The practice of minimizing potential losses in investment portfolios through diversification and other strategies.

Expected Return

The anticipated return on an investment, calculated by a weighted average of possible returns.

Capital Asset Pricing Model (CAPM)

A model used to determine the expected return on an asset based on its risk relative to the overall market.

Continuous Random Variables

Variables whose values can take on a continuous range within a given interval.

Stochastic Variable

A variable whose value is subject to randomness and uncertainty.

Deterministic Variable

A variable whose value is determined by known conditions without any uncertainty.