FIN 357 Chapter 10

Opportunity set or Feasible set

We can choose to invest in any portfolio along the curve, which represents _____________

Efficient sets or frontier

Y-variable = Expected return on portfolio X-variable = StDev of portfolio's return

Unsystematic risk

A ______ is one that affects a single asset or a small group of assets

Systematic risk

A ______ is one that influences a large number of assets, each to a greater or less extent

Portfolio

A combination of securities

Mean

Add up all the values and divide by the total

Geometric return

Answers the question " what was your actual return each year on average, compounded annually over a particular period?"

Arithmetic return

Answers the question "What was your return in an average year?"

Ibbotson Chart

Chart showing holding period returns for different capital markets

CAPM (capital asset pricing model)

Implies that the expected return on a security is linearly related to its beta

Homogeneous expectations

In a world where investors have access to similar sources of information, all investors posses the same estimates on expected returns, variances and covariances

Separation principle

Investor's devision consist of two separate steps. 1)estimate returns and covariance, efficient set, then 2)determine point to invest

Market portfolio

It is the market value weighted portfolio of all existing securities. The portfolio that everyone would hold is called the ____________

Covariance and correlation

Measure how two random variables are related

Capital Gain

The change in the price of the stock divided by the initial price

Efficient frontier

The curve from MV to Supertech

Equity risk premium

The difference between risky returns and risk-free returns is often called excess return on risky asset. It is called excess because it is the additional return resulting from the riskiness of common stocks and often called _________

Frequency distribution

The histogram of the yearly stock market returns

Security market line (SML)

The line begins at Rf and rises to E(Rm) when beta is 1

Holding period return

The return earned from the act of holding an asset over a given period of time

Beta

_______ measures the responsiveness of a security to movements in the market portfolio

Principle of diversitfication

________ tells us that spreading an investment accross many assets will eliminate some of the risk