Chapter 5-6 Midterm

refers to the total return an investment generates over a specific period, expressed as a percentage, without comparing it to any benchmark or market index.

the sum of returns in each period dividied by the number of periods (simple average)

portfolio choice among broad investment classes

rate of return in excess of the risk-free rate.

the mean value of the distribution of HPR (Holding Period Return)

estimated average return an investment is likely to generate over time, based on probailities of different possible outcomes. It is calculated using historical data or assumptions about future performance.

the single per-period return that gives the same cumulative performances as the sequence of actual returns (CAGR)

rate of return over a given investment period

the rate at which prices are rising, measured as the rate of increase of the CPI

measures of the fatness of the tails of a probability distribution relative to that of a normal distribution. Indicates likelihood of extreme outcomes.

evaluating portfolios according to their expected returns and standard deviations (or variances)

the interest rate in terms of nominal (not adjusted for purchasing power) dollars

investment polciy that avoids security analysis. Often entails indexing.

indexing refers to the practice of investing in a portfolio that mimics a market index (the S&P 500) rather than actively selecting individual stocks or timing the market.

the growth rate of purchasing power derived from an investment

rate of return that can be earned with certainty, often measured by the rate on Treasury bills

an expected return in excess of that on risk-free securities

think of it as the extra return an investor demands for taking on additional risk compared to a risk-free investment like a Tbond

ratio of portfolio risk premium to stdev

=Portfolio risk premium/standard deviation of portfolio excess return

measures of the asymmetry of a probability distribution

the square root of the variance

the expected value of the square deviation from the mean

a stock's expected excess return beyond that consistent with its beta and the market's excess return.

measures an investment's performance relative to a benchmark index (reference point used to measure the performance of an investment or portfolio) . It shows how much an investment beats or lags the market after adjusting for risk.

the sensitivity of a security's return to the return on the market index.

measures how much an investment moves relative to the overall market.

=1 --> moves in line with the market
>1 --> more volatile than the market (higher risk)
<1 --> less volatile than the market (lower risk)
=0--> no correlation with the market
<0 --> moves opposite to the market

is a statistical measure that shows how well the performance of an investment or portfolio can be explained by its relationship with a benchmark (like the market).

Simply, it tells you the percentage of the investment's movements that are correlated with the benchmark

=1 (100%)--> means the investment's performance is perfectly explainde by the benchmark
=0 --> means there is no correlation between the investment and the benchmark

the higher this is means the more reliable the benchmark is in explaining the investment's behavior.

the directional relationship between the return on two assets.

measure of how two variables (like there returns of two investments) move together. It indicates whether the two variables tend to increase or decrease at the same time.

a statistic that measures the degree to which two securities move in relation to each other.

risk that can be eliminated by diversification

is a financial model that explains a stock's return based on its relationship with a market index. It simplifies return calculations by assuming that a stock’s performance is influenced by the overall market and some firm-specific factors.

risk factors the the whole economy, cannot be eliminated by diversification