Chapter 11: Risk and Return

The minimum required return on a new investment

Cost of Capital

Spreading an investment across a number of assets will eliminate some, but not all, of the risk

Principle of diversification

A risk that affects at most a small number of assets. Also, unique or asset-specific risk

Unsystematic risk

The excess return an asset earns based on the level of risk taken

Alpha

The amount of systematic risk present in a particular risky asset relative to that in an average risky asset

Beta coefficient

Equation of the security market line showing the relationship between expected return and beta

Capital Asset Pricing Model (CAPM)

The return on a risky asset expected in the future

Expected return

The slope of the SML - the difference between the expected return on a market portfolio and the risk-free rate

Market Risk Premium

The percentage of a portfolio's total value that is invested in a particular asset

Portfolio weight

A positively sloped straight line displaying the relationship between expected return and beta

Security Market Line (SML)

The expected return on a risky asset depends only on that asset's systematic risk

Systematic risk principle