Unit 7 - Risk and Opportunity Cost

__________ is a representation of historic returns of a period of time which shows how often each return occurs

Frequency Distribution

__________ is a formula/table of info that showcases potential outcomes and the likelihood of them occurring.

Probability distribtuion

__________ is a probability distribution that contains a small, countable number of observations

Discrete distribution

__________ is a probability distribution containing an infinite number of observations being analyzed using quantitative measures based on math and calculus

Continuous distribution

__________ is the average of all possible realized returns weighted by their probability of occuring

Expected return

__________ measures how possible realized returns may vary from calculated expected returns

Variance

Formula for calculating asset expected return

E(R) = p1( r1) + p2( r2) …

p = Probability

r = Rate of return given

Calculator steps for expected return, standard deviation, and variance for a list

STAT → EDIT→ L1 = rate of return, L2 = probability.

STAT→ CALC→1: 1-Var Stats → Enter L1, L2, ENTER

x̄ = Rate of return

σx = Standard Deviation

σx² = Variance

a __________ is a collection of economic assets such as stocks and bonds

Portfolio

__________ is a process of reducing risk of a portfolio by holding assets whose returns are not perfectly correlated

Diversification

__________ is a probability distribution containing the likelihood of two events occurring together

Joint probability distribution

__________ is an example of holding a portfolio

Real estate property, baseball card collectables

__________ is an example of diversification (FF)

Being in 4 different leagues, and in 3 of them you drafted Travis Hunter. In one league, however, you chose to invest in Tet McMillan with your pick in the off-chance Hunter is a bust, you have a fall back

__________ is the wealth-weighted average of the expected returns of the assets held in someones portfolio

Portfolio expected return

__________ is a combination of the wealth-weighted average of the variances on two assets and their covariance

Portfolio variance

__________ measures the degree to which two rates of return move together

Covariance

__________ measures the direction of coverability and the strength of the relationship

Correlation coefficient

__________ is risk that is special to an individual company. It varies from company to company and can be diversified

Unique risk

__________ is risk that affects all companies in the economy, and cannot be diversified since it affects all market participants.

Market risk

The two ways to make money by investing in stocks are __________ and __________

Capital gains and dividends

__________ is an investment made up from a pool of money collected from many investors for the purpose of investing in securities such as stocks, bonds, and other assets. They are operated by professionals who often use these investments to produce gains/income for fund’s investors

Mutual fund

__________ are investments using pooled funds that employ numerous different strategies to earn active return for their investors. Usually only accessible to accredited investors since they require less SEC regulations.

Hedge funds

__________ is a measure of the market risk of an asset, and how it varies dependent on the market return is a risk that cannot be diversified away

Beta

__________ is a model that uses market risk to calculate the opportunity cost or expected rate of return of an asset

Capital Asset Pricing Model (CAPM)

What is the formula for the Capital Asset Pricing Model (CAPM)?

E(Ri) = Rf + [E(RM) – Rf] × Bi

E(Ri) = Expected Return

E(Rm) = Expected Market Return

Bi = Beta

Rf = Risk-free Rate