acc212: Apply Capital Asset Pricing Model (CAPM) concepts in evaluating investments.

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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.


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