2181 - Chapter 6 - Key terms

Front

risk premium

Back

An expected return in excess of that on risk-free securities; provides compensation for the risk of an investment.

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fair game

Back

An investment prospect that has a zero-risk premium.

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risk averse

Back

An investor who will consider risky portfolios only if they provide compensation for risk via a risk premium.

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risk lover

Back

An investor who is willing to accept lower expected returns on prospects with higher amounts of risk.

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mean–variance (M–V) criterion

Back

The selection of portfolios based on the means and variances of their returns.

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indifference curve

Back

Connects all portfolios with the same utility according to their means and standard deviations.

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complete portfolio

Back

The entire portfolio, including risky and risk-free assets.

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risk-free asset

Back

One with a certain rate of return; often taken to mean short-term T-bills.

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capital allocation line (CAL)

Back

A graph showing all feasible risk–return combinations of a risky and risk-free asset.

Front

reward-to-volatility ratio

Back

Ratio of excess return to standard deviation; usually called the Sharpe ratio.