FIN 3013 Non-Math Concept Flashcards

A collection of conceptual vocabulary terms and definitions covering market efficiency, risk types, and the Security Market Line (SML) based on the FIN 3013 review session.

Geometric average return

The average compound return earned per year over a multiyear period.

Efficient capital market

A market in which security prices reflect all available information.

U.S. Treasury bills

A specific security type that has a risk premium of $0\%$.

Efficient Market Price Reaction

A reaction where the price rises rapidly and stays higher following a positive announcement, such as a new patent.

Market Price Adjustments (Efficient)

If financial markets are efficient, prices respond only to unexpected news or events.

Semistrong form market efficiency

The state of efficiency where security value is based on all publicly available information.

Strong form efficient market

A market level where even an individual with insider information cannot earn excess profits.

Systematic risk

Risk that affects a large number of assets; also referred to as market risk.

Diversification

The process of investing in a variety of assets to reduce risk.

Systematic risk principle

A principle stating that the expected return on an asset depends only on the asset’s market risk.

Beta coefficient

A measure used to determine the amount of systematic risk of an asset relative to the market.

Security market line (SML)

A graphical representation of the relationship between expected return and beta.

Slope of the security market line

The mathematical representation of the market risk premium.

Cost of capital

The minimum required return that makes an investment attractive.

Unsystematic risk example

An asset-specific event like a warehouse fire.

Systematic risk example

A broad economic event like increased consumption resulting from tax cuts.

Standard deviation

A statistical measure used to calculate total risk.

Risk premium (Individual Security)

The compensation for an individual security based specifically on its systematic risk.

Unsystematic risk compensation

The compensation investors should expect for bearing unsystematic risk is $0$.

Portfolio diversification

An investment strategy that eliminates unsystematic risk.

Beta for low-risk positive return security

For a security to have a positive return but less risk than the market, the beta must be greater than $0$ but less than $1$.

Vertical intercept of the security market line

The point on the graph representing the risk-free rate.

CAPM (Capital Asset Pricing Model) variables

Expected return is affected by the market risk premium, risk-free rate, market return, and security beta, but not by security standard deviation.