Review for Final Exam!

Review for Final Exam! - Review for Final Exam Risk and...

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Review for Final Exam Risk and Return: Past and Prologue (chapter 5) 1. Holding-Period Return (HPR): Rate of return over given investment period HPR= [PS − PB + CF] / PB 2. Arithmetic average: Sum of returns in each period divided by number of periods Geometric average: The single per-period return that gives the same cumulative performance as the sequence of actual returns Dollar-weighted return: The internal rate of return on an investment 3. APR: Annual percentage rate APR = Per-period rate × Periods per year 4. Scenario analysis: Possible economic scenarios; specify likelihood and HPR 5. The Sharpe (Reward-to-Volatility) Ratio: Ratio of portfolio risk premium to standard deviation 6. Mean-Variance Analysis: Ranking portfolios by Sharpe ratios 7. Capital Allocation Line (CAL): Plot of risk-return combinations available by varying allocation between risky and risk-free Efficient Diversification (chapter 6) 1. Market/Systematic/Nondiversifiable Risk : Risk factors common to whole economy 2. Unique/Firm-Specific/Nonsystematic/ Diversifiable Risk : Risk that can be eliminated by diversification 3. Mean-Variance Criterion : If E(r A ) ≥ E(r B ) and σ A σ B then Portfolio A dominates portfolio B 4. Optimal Risky Portfolio : The optimal risky portfolio has the highest Sharpe ratio. 5. Efficient Frontier of Risky Assets : Graph representing set of portfolios that maximizes expected return at each level of portfolio risk Capital Asset Pricing and Arbitrage Pricing Theory (chapter 7) 1. The Capital Asset Pricing Model: Model that relates the required rate of return on a security to its systematic risk as measured by beta 2. The Security Market Line (SML): Represents expected return-beta relationship of CAPM – Provides “hurdle rate” for internal projects 3. Alpha : Abnormal rate of return on security in excess of that predicted by equilibrium model (CAPM) 4. Fama-French three-factor model 5. Arbitrage Pricing Theory (APT): Risk-return relationships from no-arbitrage considerations in large capital markets
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