Chapter 5

Method for predicting how investment returns are determined in an efficient capital market.

Current value of all assets.

Linear risk return trade off for all investment portfolios.

Linear risk return trade off for individual stocks.

Return volatility tied to the overall market.

Return volatility specific to an individual company.

Another term for unsystematic risk.

Another term for systematic risk.

Sensitivity of a security's returns to the systematic market risk factor.

Linear relation between the return on individual securities and the overall market at every point in time.

Security or portfolio return less the risk free rate.

Above average return that cannot be explained as compensation for added risk.

Below average return that cannot be explained by below market risk.

Distortion to beta estimates caused by the fact that market indexes are only imperfect proxies for the overall market.

Distortion to beta estimates because the SCL fails to include other important systematic influences on stock market volatility.

Beta estimation problem derived from the fact that beta estimates depend on the data interval studied.

Difficulty tied to the fact that betas are inherently unstable.

Asset pricing model that assumes portfolio risk is tied to market risk and other factors, such as firm size and P/B ratio.

Multifactor asset pricing model that allows market betas to represent only one of the firm's many risk factors.

Simultaneous buying and selling of the same asset at different prices to capture a mispricing.

Belief that stocks with high prior returns will continue to achieve high returns in the future. Stocks with low prior returns are believed to continue earning low returns.

Investors who make systematic errors when they assess the characteristics of companies and expected stock returns.

Diversified portfolio of similar risk or investment style used as a comparison.

Abnormal return measured from the CAPM required rate of return.

Ability to pick stocks that outperform the overall stock market.

Investment style that attempts to buy into the stock market before a bull market move and sell before a bear market move.

Risk premium earned relative to total risk.

Risk premium earned relative to systematic risk.