Question

Term Description Risk A. The term applied to the risk of an asset that is measured by the standard deviation of the asset's expected returns. That portion of an investment's risk calculated as the difference between its total risk and its firm-specific risk. Expected rate of return B. Beta coefficient L C . This model determines the appropriate required return on a security as the sum of the market's risk-free rate and a risk premium based on the market's risk premium and the security's beta coefficient. Market risk D. 1000 0 00000 0 The portion of an asset's total expected return required by investors as compensation for assuming the additional risks associated with the security, the issuer, and the marketplace. Correlation coefficient (P) A measure of the sensitivity of a security's returns to fluctuations in the return earned by the market portfolio. Stand-alone risk F. The potential for variability in the possible outcomes associated with an investment. Risk premium Diversification G. The mean of the probability distribution of an investment's possible returns, and the return expected to be realized from owning it. H. A measurement of the tendency of two variables to move together. I. The condition of price stability that results from the equality of a security's expected and required returns. J. The result of adding additional assets to a portfolio, when the returns of Capital Asset Pricing Model Equilibrium the ladiel

Answer 1

Term Answer Risk Expected rate of return Description The potential for variability in the possible outcomes associated with an investment. The mean of the probability distribution of an investment's possible returns, and the return expected to be realized from owning it. E.g. State of Probability Stock 'X' return economy Recession 0.20 10% Normal 0.80 40% Expected return of Stock 'X'= (0.20 x 10) + (0.80 x 40) = 34% A measure of the sensitivity of a security's returns to fluctuations in the return earned by the market portfolio. e Covariance of market return with security return - or Variance of market return Standard deviation of security returns B = Correlation coefficient between market and security corretation coerent betweer net resource sta Standard deviation of market retuns That portion of an investment's risk calculated as the difference between its total risk and its firm-specific risk. It is also called systematic risk. It cannot be eliminated through diversification. Beta coefficient Market risk

H Correlation coefficient A measurement of the tendency of two variables to move together. Cov (x,y) рху о, ХОy Stand-alone risk A Risk premium Pxy = correlation coefficient Cov(x,y) = covariance between securities x & y • Ox = standard deviation of security x O, = standard deviation of security y The term applied to the risk of an asset that is measured by the standard deviation of the asset's expected returns. The portion of an asset's total expected return required by investors as compensation for assuming the additional risks associated with the security, the issuer, and the marketplace. Compensation for extra risk undertaken in relation to risk-free asset. The result of adding additional assets to a portfolio, when the returns of the individual assets are non-correlated. It is done to eliminate unsystematic risk in a portfolio. Diversification

Capital Asset Pricing Model This model determines the appropriate required return on a security as the sum of the market's risk-free rate and a risk premium based on the market's risk premium and the security's beta coefficient. Rį = Rpg + B(Rm – Rrf) • Ri = Expected return on security • Rrf = Risk free rate of return • B = Beta of the security • Rm = Expected return on market portfolio • (Rm - Rrf) = Market risk premium The condition of price stability that results from the equality of a security's expected and required returns. Equilibrium