Topical review
- Identify and measure two sources of returns from investments – income and capital gains
- Use probability distributions to measure expected return and stand-alone risk (standard deviation)
- Interpret standard deviation
- Explain the concept of risk aversion and how this leads to the risk-return trade-off in finance
- Indicate why the concept of risk changes when viewed in a portfolio context (diversification)
- Discuss the role of correlation in diversifying portfolios
- Distinguish market risk and firm specific risk
- Illustrate how diversification reduces firm specific risk
- Define the beta of an investment and explain what it measures
- Briefly illustrate how the beta of an investment is measured - no actual regressions are necessary
- Describe the risk-reward trade-off embedded in CAPM
- Use the security market line to determine if an investment is fairly priced - describe the market forces which bring an investment to equilibrium
- Risk concepts: probability distribution, expected return, stand-alone risk, variance, standard deviation, coefficient of variation, risk aversion, beta, systematic risk (a.k.a., market risk or beta risk), nonsystematic risk (a.k.a., firm specific risk or idiosyncratic risk), correlation, diversification
- CAPM: market portfolio, market risk premium, security market line
4, 7
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