Chapter 5

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Chapter 5
2010-10-04 17:22:43

Chapter 5
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  1. Capital Asset Pricing Model (CAPM)
    Method for predicting how investment returns are determined in an efficient capital market.
  2. Market Portfolio
    Current value of all assets.
  3. Capital Market Line (CML)
    Linear risk return trade off for all investment portfolios.
  4. Security Market Line (SML)
    Linear risk return trade off for individual stocks.
  5. Systematic Risk
    Return volatility tied to the overall market.
  6. Unsystematic Risk
    Return volatility specific to an individual company.
  7. Diversifiable Risk
    Another term for unsystematic risk.
  8. Nondiversafiable Risk
    Another term for systematic risk.
  9. Beta
    Sensitivity of a security's returns to the systematic market risk factor.
  10. Security Characteristic Line (SCL)
    Linear relation between the return on individual securities and the overall market at every point in time.
  11. Excess Return
    Security or portfolio return less the risk free rate.
  12. Positive Abnormal Return
    Above average return that cannot be explained as compensation for added risk.
  13. Negative Abnormal Return
    Below average return that cannot be explained by below market risk.
  14. Market Index Bias
    Distortion to beta estimates caused by the fact that market indexes are only imperfect proxies for the overall market.
  15. Model Specification Bias
    Distortion to beta estimates because the SCL fails to include other important systematic influences on stock market volatility.
  16. Time Interval Bias
    Beta estimation problem derived from the fact that beta estimates depend on the data interval studied.
  17. Nonstationary Beta Problem
    Difficulty tied to the fact that betas are inherently unstable.
  18. Multifactor CAPM
    Asset pricing model that assumes portfolio risk is tied to market risk and other factors, such as firm size and P/B ratio.
  19. Arbitrage Pricing Theory (APT)
    Multifactor asset pricing model that allows market betas to represent only one of the firm's many risk factors.
  20. Arbitrage
    Simultaneous buying and selling of the same asset at different prices to capture a mispricing.
  21. Momentum
    Belief that stocks with high prior returns will continue to achieve high returns in the future. Stocks with low prior returns are believed to continue earning low returns.
  22. Noise Traders
    Investors who make systematic errors when they assess the characteristics of companies and expected stock returns.
  23. Benchmark
    Diversified portfolio of similar risk or investment style used as a comparison.
  24. Alpha
    Abnormal return measured from the CAPM required rate of return.
  25. Selectivity
    Ability to pick stocks that outperform the overall stock market.
  26. Market Timing
    Investment style that attempts to buy into the stock market before a bull market move and sell before a bear market move.
  27. Sharpe Ratio
    Risk premium earned relative to total risk.
  28. Treynor Index
    Risk premium earned relative to systematic risk.