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ndumas2
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Risk premium
the excess return required from an investment in a risky asset ofver that required from a risk-free investment
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What do we mean by excess return and risk premium?
, Excess return refers to the extra return earned from taking on risk. the risk premium is the return over and above the risk-free rate
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What was the real (as opposed to nominal) risk premium on the common stock portfolio?
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What was the nominalrisk premium on corporte bonds? The real risk premium?
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What is the first lesson from capital market history?
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The average squared differnce between the acutal return and the average return is...
Variance
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The postive square root of the variance is...
Standard Deviation
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A symmetric, bell-shaped frequency distribution that is completly defined by its mean and standard devation is...
normal distribution
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In words, how do we calculate a variance?
sum of squared deviations from the mean/ (number of observations-1)
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In words how do we calculate a standard deviation?
standard deviation = square root of the variance
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With a normal distribution, what is the probability of ending up more than one standard deviation below the average?
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Assuming that long-term corporate bonds have an approximatly nomrla distribution, what is the approximate probablity of earning 14.6 percent or more in a given year? with T-bills, rough what is this probability?
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What is the second lesson from capital market history?
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A market in which security prices reflect available information is
an efficent capital market
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Efficent Markets hypothessi (EMH) is...
The hypothesis that actual capital markets such as the NYSE are efficient
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What are forms of market efficency?
- semistrong from efficiency
- strong form efficiency
- weak form efficiency
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The reurn on a risky asset expecte din the future is called
Expected return
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How do we clculate the expected return on a security?
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In words how do we calculate the variance of the expected return?
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A risk that invluences a large number of assets, Also, market rixk is called
Systematic risk
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A risk that affects at most a small number of assets, also unique or assetspecific risk
unsystematic risk
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What are the two basic types of risk?
Systematic risk and Unsystematic risk
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What is the distinction between the two types of risk?
The two types of risk are:
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Systematic risk principal states that
The expected return on a risky assett depends only on that assets's systematic risk
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Beta coefficent is
the amount of systematic risk present in a particular risky asset relative to that in an averager risky asset
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What does a beta coefficent measure?
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True or false: the expected return on a risky asset depends on taht asset's total risk
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how do you calculate portfolio beta?
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