Finance: Risk, Returns, and Efficient Markets

Risk Premium

The return required from an investment in a risky asset over a risk-free investment.

Variance

Difference between the actual return and the average return.

Standard Deviation

The positive square root of the variance.

Normal Distribution

A symmetric, bell-shaped frequency that is defined by its mean and standard deviation.

Geometric Average Return

Average compound return earned per year over a multiyear period.

Arithmetic Average Return

The return earned in an average year over a multiyear period.

Efficient Capital Market

A market in which security prices reflect available information.

Efficient Markets Hypothesis (EMH)

The hypothesis that actual capital markets, such as the NYSE, are efficient.