Key Terms - Chapter 5 Arithmetic average The sum of returns...

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Chapter 5 Arithmetic average The sum of returns in each period divided by the number of periods Asset allocation Portfolio choice among broad investment classes Capital allocation line Plot of risk-return combinations available by varying portfolio allocation between a risk-free asset and a risky portfolio Capital market line The capital allocation line using the market index portfolio as the risky asset Complete portfolio The entire portfolio including risky and risk-free assets Dollar weighted average return The internal rate of return on an investment Excess return Rate of return in excess of the Treasury-bill rate Expected return The mean value of the distribution of holding period returns Geometric average The single per-period return that gives the same cumulative performance as the sequence of actual returns Holding period return Rate of return over a given investment period Inflation rate The rate at which prices are rising measured as the rate of increase of the CPI Nominal interest rate The interest rate in terms of nominal (not adjusted for purchasing power) dollars Passive strategy Investment policy that avoids security analysis Probability distribution List of possible outcomes with associated probabilities Real interest rate The excess of the interest rate over the inflation rate; the growth rate of purchasing power derived from an investment Reward to variability ratio Ratio of risk premium to standard deviation Risk aversion Reluctance to accept risk Risk-free rate The rate of return that can be earned with certainty Risk premium An expected return in excess of that on risk-free securities Scenario analysis Process of devising a list of possible economic scenarios and specifying the likelihood of each one, as well as the HPR that will be realized in each case Standard deviation The square root of the variance Variance The expected value of the squared deviation from the mean Chapter 6 Beta The sensitivity of a security’s returns to the systematic or market factor Diversifiable risk (Also unique, firm specific,
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Key Terms - Chapter 5 Arithmetic average The sum of returns...

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