return
What is earned on an investment: the sum of income and capital gains generated by an investment
required return
Return necessary to induce an individual to make an investment
risk
Possibility of loss; the uncertainty that the anticipated return will not be achieved
diversifiable risk (unsystematic risk)
Risk associated with individual events that affect a particular asset; firm-specific risk that
is reduced through the construction of diversified portfolios
business risk
Risk associated with the nature of a business
financial risk
Risk associated with the types of financing used to acquire assets
nondiversifiable risk (systematic risk)
Risk associated with fluctuations in securities prices and other nonfirm- specific factors: market risk that is not reduced through the construction of diversified portfolios
market risk
Risk associated with fluctuations in securities prices
interest rate risk
risk associated with changes in interest rates
reinvestment rate risk
Risk associated with reinvesting earnings on principal at a lower rate than was initially earned
purchasing power risk
Uncertainty that future inflation will erode the purchasing power of assets and income
exchange rate risk
risk of loss from changes in the value of foreign currencies
Sovereign Risk
risk associated with a government defaulting on its debt obligations
Standard deviation
measure of dispersion around an average value; measure of risk
beta coefficient
index of systematic risk; measure of the volatility of a stock's return relative to the market return
Portfolio Risk
total risk associated with owning a portfolio; sum of systematic and unsystematic risk
Capital Asset Pricing Model (CAPM)
Model used in the valuation of an asset that specifies the required return for different levels of risk