Homogeneous Expectations
The assumption that all investors agree on the probability distribution of future returns, so they all use the same input list.
Market Portfolio
The portfolio encompassing all assets in which each asset is held in proportion to its market value.
Mutual Fund Theorem
A result associated with the CAPM, asserting that investors will choose to invest their entire risky portfolio in a market-index mutual fund.
Market Price Of Risk
A measure of the extra return, or risk premium, that investors demand to bear risk. The ratio of the risk premium of the market portfolio to the variance of its return.
Beta
The measure of the systematic risk of a security. The tendency of a security's returns to respond to swings in the broad market.
Expected Return-Beta (or mean-beta) Relationship
Implication of the CAPM that security risk premiums (expected excess returns) will be proportional to beta.
Security Market Line (SML)
Graphical representation of the expected return-beta relationship.
Alpha
The abnormal rate of return on a security in excess of what would be predicted by an equilibrium model like the CAPM.
Zero-Beta Portfolio
The minimum-variance portfolio uncorrelated with a chosen efficient portfolio.
Liquidity
The speed and ease with which an asset can be converted to cash.
Illiquidity
Difficulty, cost, and/or delay in selling an asset on short notice without offering substantial price concessions.