Portfolio
A collection, or group, of assets.
Risk
A measure of the uncertainty surrounding the return that an investment will earn or, more formally, the variability of returns associated with a given asset.
Total Rate of Return
The total gain or loss experienced on an investment over a given period of time.
Risk Averse
The attitude toward risk in which investors would require an increased return as compensation for an increase in risk.
Risk Neutral
The attitude toward risk in which investors choose the investment with the higher return regardless of its risk.
Risk Seeking
The attitude toward risk in which investors prefer investments with greater risk even if they have lower expected returns.
Scenario Analysis
An approach for assessing risk that uses several possible alternative outcomes to obtain a sense of the variability among returns.
Range
A measure of an asset's risk, which is found by subtracting the return associated with the pessimistic outcome from the return associated with the optimistic outcome.
Probability
The chance that a given outcome will occur.
Probability Distribution
A model that relates probabilities to the associated outcomes.
Bar Chart
The simplest type of probability distribution; shows only a limited number of outcomes and associated probabilities for a given event.
Continuous Probability Distribution
A probability distribution showing all the possible outcomes and associated probabilities for a given event.
Standard Deviation
The most common statistical indicator of an asset's risk; it measures the dispersion around the expected value.
Expected Value of a Return
The average return that an investment is expected to produce over time.
Normal Probability Distribution
A symmetrical probability distribution whose shape resembles a "bell-shaped" curve.
Coefficient of Variation
A measure of relative dispersion that is useful in comparing the risks of assets with differing expected returns.
Efficient Portfolio
A portfolio that maximizes return for a given level of risk.
Correlation
A statistical measure of the relationship between any two series of numbers.
Positively Correlated
Describes two series that move in the same direction.
Negatively Correlated
Describes two series that move in opposite directions.
Correlation Coefficient
A measure of the degree of correlation between two series.
Perfectly Positively Correlated
Describes two positively correlated series that have a correlation coefficient of +1.
Perfectly Negatively Correlated
Describes two negatively correlated series that have a correlation coefficient of -1.
Uncorrelated
Describes two series that lack any interaction and therefore have a correlation coefficient close to zero.
Political Risk
Risk that arises from the possibility that a host government will take actions harmful to foreign investors or that political turmoil will endanger investments.
Capital Asset Pricing Model (CAPM)
The basic theory that links risk and return for all assets.
Total Risk
The combination of a security's nondiversifiable risk and diversifiable risk.
Diversifiable Risk
The portion of an asset's risk that is attributable to firm-specific, random causes; can be eliminated through diversification, known as unsystematic risk.
Nondiversifiable Risk
The relevant portion of an asset's risk attributable to market factors that affect all firms; cannot be eliminated through diversification, known as systematic risk.
Beta Coefficient
A relative measure of nondiversifiable risk. An index of the degree of movement of an asset's return in response to a change in the market return.
Market Return
The return on the market portfolio of all traded securities.
Risk-Free Rate of Return
The required return on a risk-free asset, typically a 3-month U.S. Treasury bill.
U.S. Treasury Bills (T-Bills)
Short-term IOUs issued by the U.S. Treasury; considered the risk-free asset.
Security Market Line (SML)
The depiction of the capital asset pricing model (CAPM) as a graph that reflects the required return in the marketplace for each level of nondiversifiable risk.