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