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Risk and Return Relationship
Historical data shows a positive correlation between risk and return.
Diversification
Owning various stocks in a portfolio to mitigate firm-specific risk.
Market Risk
Risk associated with stock ownership beyond firm-specific risk.
CAPM
Capital Asset Pricing Model that uses Beta to measure market risk.
Expected Return
Forward-looking calculation based on return probabilities and their likelihoods.
Standard Deviation
Measure of stock risk based on historical returns' variability.
Risk Premium
Part of expected return comprising risk-free rate and return premium.
Market Risk Premium
Reward for taking general stock market risk.
Efficient Frontier
Portfolio combinations offering highest return for each risk level.
Financial Leverage
Borrowing money to invest, increasing portfolio risk.
Security Market Line
Relates required return to risk, considering market portfolio's risk premium.
Company Risk Premium
Risk premium calculation for a specific company like Netflix.
Stock Market Bubble
Inflated market leading to dramatic price collapse.
Portfolio Beta
Weighted average of individual stock betas in a portfolio.
Efficient Market
Securities market where prices reflect all available information on each security
Efficient Market Hypothesis (EMH)
Theory that security prices fully reflect all available information
Executive Stock Options
Special rights for corporate executives to buy company stock at a fixed price
Market Portfolio
Theoretical combination of securities placing a portfolio on the efficient frontier
Overconfidence
Tendency to overestimate knowledge and underestimate risks
Penny Stocks
Stocks of small companies priced below $1 per share
Behavioral Finance
Study of cognitive biases in financial decision-making
Restricted Stock
Shares issued to employees with limitations on sale
Capital Asset Pricing Model (CAPM)
Model specifying the relationship between required return and risk
Capital Market Line (CML)
Line on a graph of return and risk through the market portfolio
Beta (β)
Measure of sensitivity of a stock or portfolio to market risk
Asset Pricing
Process of specifying the relationship between required return and risk
Constant-Growth Model
Alternative to CAPM for computing shareholders' required return
Diversifiable Risk
Risk that can be reduced through diversification
Non-diversifiable Risk
Risk that cannot be eliminated through diversification
Modern Portfolio Theory
Concept of combining securities into a portfolio to minimize risk
