Chapter 4

  1. Nominal Risk Free Rate
    Monetary reward for postponing consumption (T-Bill Return)
  2. Real Risk Free Rate of Return
    Return without chance of default or volatility.
  3. Inflation
    Increase in the cost of goods and services over time.
  4. Required Risk Premium
    Necessary compensation for risk taking.
  5. Total Return
    The sum of dividends, interest income, and capital gains or capital losses.
  6. Arithmetic Average Return
    Sum of investment returns divided by number of periods or securities.
  7. Geometric Mean Return
    Compound rate of return earned on investment.
  8. Nominal Return
    Gross investment profit expressed as a percentage.
  9. Real Return
    Investment return after inflation.
  10. Standard Deviation
    Common risk measure.
  11. Coefficient of Variation
    Relative risk reward measure.
  12. Covariance
    Absolute measure of comovement that varies between plus and minus infinity.
  13. Correlation
    Measure of comovement that varies between -1 and +1.
  14. Investment Horizon
    Holding Period.
  15. Market Risk
    General fluctuation in stock and bond prices.
  16. Firm Specific Risk
    Chance that problems with an individual company will reduce the value of investment.
  17. Valuation Risk
    Chance of loss due to relatively high stock prices.
  18. Reversion to the Mean
    Tendency of stock and bond returns to return toward long term averages.
  19. Interest Rate Risk
    Chance of loss in the value of fixed income investments following a rise in interest rates.
  20. Credit Risk
    Chance of loss due to issuer default.
  21. Investment Portfolio
    Collection of securities that together provide an investor with an attractive trade off between risk and return.
  22. Portfolio Theory
    Concept of making security choices based on portfolio expected returns and risks.
  23. Expected Return
    Anticipated profit over some relevant holding period.
  24. Risk
    Return volatility; usually measured by the standard deviation of returns.
  25. Probability Distribution
    Apportionment of likely occurrences
  26. Utility
    Positive benefit.
  27. Disutility
    Psychic loss.
  28. Risk Averse
    Characterized by desire to avoid risk.
  29. Zero Risk Portfolio
    Constant return portfolio.
  30. Efficient Portfolio
    Portfolio with maximum expected return for a given level of risk or with minimum risk for a given expected return.
  31. Efficient Frontier
    Collection of all efficient portfolios
  32. Optimal Portfolio
    Collection of securities that provides an investor with the highest level of expected utility.
  33. Myopic
    Short term focus.
  34. House Money Effect
    Propensity to take risky gambles after winning some money.
  35. Mental Accounting
    Thinking about money and investing using individual categories instead of a unified perspective.
Card Set
Chapter 4
Chapter 4