Finance chapters 11-12

Systematic Risk (aka market risk or undiversifiable risk)

influences many assets (For Example, uncertainties about general economic conditions, such as GDP, interest rates, or inflation)

Unsystematic Risk (aka unique risk or diversifiable risk)

is a risk that affects at most a small number of asset (For Example, the announcement of an oil strike by a company).

Market Cap Weighted (Index)

is a type of stock market index in which each component stock is weighted according to its total market capitalization—that is, the total value of all its outstanding shares.

Equal Weighted (Index)

is a stock index where each company has the same importance, no matter how big or small the company is.

Price Weighted (Index)

is a stock index where each company's influence on the index is based on its stock price, not its size or value.

Capital Asset Pricing Model

is the equation of the S M L showing the relationship between expected return and beta.

Beta

represents how much a stock's price moves relative to the overall market—in other words, it's a measure of systematic risk.

In CAPM, Beta

tells you how much extra return you should expect from a stock, based on its risk compared to the market.

Cost of Equity

is the return that equity investors require on their investment in the firm.

Cost of Debt

is the return that lenders require on the firm’s debt.

Weighted Average Cost of Capital

is the average rate a company is expected to pay to finance its assets, weighted by the proportion of each source of capital (like debt and equity).