Finance Chapter 13 Flashcards

Expected Returns

probabilities of possible outcomes

variance and standard deviation

measure the volatility of returns


collection of assets

realized returns are general not _____ to expected returns


unexpected returns can either be _____ or ______ over time

positive or negative

__________ are a result of investors trading on the unexpected
portion of announcements

efficient markets

Systematic Risk

Risk factors that affect a large number of assets. aka non
diversifiable risk or market risk (CDP, inflation)

Unsystematic Risk

risk factors that affect a limited number of assets. aka unique risk
and asset specific risk (labor strikes, part shortage)

Total Returns =

expected + unexpected return

unexpected return =

systematic portion + unsystematic portion

Total Return =

expected return + systematic + unsystematic

Diversifiable Risk

The risk that can be eliminated by combining assets into a portfolio

Total Risk =

systematic + unsystematic

the ___ ____ of returns is the measure of total risk

standard deviation

Beta coefficient measures ______ _______

systematic risk

Risk Premium =

expected return - risk free rate

The Security Market Line (SML) is

the representation of market equilibrium

The slope of the SML is the

reward to risk ratio

Capital asset pricing model (CAPM)

defines the relationship between risk and return

If we know an assets systematic risk, we can use the CAPM to
determine its expected return