Risk and Return of Financial Markets

Vocabulary

alpha return

excess return of an investment over a benchmark or index, such as the S&P 500

beta return

measure of the volatility of the return of an investment, creating an opportunity for a quick return or loss

coefficient of variation (CV)

measure of the dispersion of the data used in statistics

correlation

correspondence of movement between one variable and another, showing that there is a link between the two

derivative

contract allowing for the transfer of an underlying asset without actually transferring the asset

diversifiable risk

risk that can be mitigated by mixing investments across sectors and types

modern portfolio theory

theory that posits that investors can develop an optimum risk-return profile using a diversified portfolio

negative correlation

relationship between two variables in which one increases when the other decreases

nondiversifiable risk

risk that cannot be mitigated by mixing investments across sectors and types

option

derivative with a contract that allows, but does not obligate, the purchase or sale of an asset

portfolio

blend of investments held by an investor that will match their risk-return profile

positive correlation

relationship between two variables in which one increases when the other increases

R-squared measure

risk-return measure that shows the amount of variance of one variable because of the movement of another

standard deviation

statistical measurement of the distribution or spread of a data set

variance

measurement of the spread of data points