Risk & Return - Capital Market Theory

These flashcards cover key concepts from Chapter 8 of Risk & Return, focusing on critical finance terms and their definitions.

Expected Rate of Return

The anticipated return on an investment, factoring in expected risks.

Volatility

A statistical measure of the dispersion of returns for a given security or market index.

Diversification

The practice of spreading investments across various assets to reduce risk.

Systematic Risk

The inherent risk associated with market-wide factors that cannot be eliminated through diversification.

Capital Asset Pricing Model (CAPM)

A model that describes the relationship between systematic risk and expected return, used to price risky securities.

Beta

A measure of a stock's volatility in relation to the overall market.

Correlation Coefficient

A statistical measure that represents the strength and direction of the relationship between two variables.

Covariance

A measure of how much two random variables change together.

Risk-Return Tradeoff

The principle that potential return rises with an increase in risk.

Portfolio Variance

A measurement of the dispersion of returns in a portfolio, influenced by the individual variances and covariances of the assets.