acc212: Apply Capital Asset Pricing Model (CAPM) concepts in evaluating investments.
Beta
It measures the co-movement between a stock and the market portfolio.
Capital Asset Pricing Model
It is a model developed to help determine a share's required rate of return for a given level of risk.
Diversifiable risk
Sources of diversifiable or unsystematic risk include lawsuits, strikes, company management, marketing strategies and research and development programs, operating and financial leverage and other events that are unique to a particular firm
Undiversifiable risk
This is the part of a security's risk caused by factors affecting the market as a whole
Diversifiable risk
This is the part of the security's risk caused by factors unique to a particular firm
Security Market Line
a graphical presentation of CAPM.
Undiversifiable risk
also called systematic or market risk
Diversifiable risk
also called unsystematic risk or company risk
Beta
is a measure of the sensitivity of a security's return relative to the returns of a broad-based market portfolio securities.
Capital Asset Pricing Model
is a model based on the proposition that any stocks required rate of return is equal to the risk-free rate of return plus a risk premium that reflects only the risk remaining after diversification.
Undiversifiable risk
is affected by such factors as wars, inflation, interest rates, business cycles, fiscal and monetary policies
average-risk stock
is defined as one that tends to move up and down in step with the general market as measured by some index, such as PSE Index, Dow Jones Industrials, the S&P 500 or the New York Stock Exchange Index.
Market risk premium
is the difference between the market rate of return and the risk-free rate; computed as
Market rate of return
is the expected rate of return of the market as a whole.
Beta coefficient
is the measure of risk when assets are held in a portfolio.
Risk-free rate
is the rate of return that an investor would require in a riskless investment.
Risk premium
is the return required as compensation to investors for taking risk; computed as:
inflation premium
represents compensation for expected future inflation
Security Market Line
represents the linear relationship between a security's required rate of return and its risks as measured by beta.
real rate
that excludes any inflationary expectations
Risk premium
the additional compensation that he requires for investing in a risky asset.
Capital Asset Pricing Model
uses beta as a measure of risk
Capital Asset Pricing Model
uses only one part of the total risk called the systematic risk, in evaluating the risk-return relationship.
