2181 - Chapter 7 - Key terms

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diversification

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Spreading a portfolio over many investments to avoid excessive exposure to any one source of risk.

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insurance principle

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The law of averages. The average outcome for many independent trials of an experiment will approach the expected value of the experiment.

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market risk

Back

Factors common to the whole economy; non-diversifiable risk, also called systematic risk.

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systematic risk

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Factors common to the whole economy; non-diversifiable risk, also called market risk.

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Non-diversifiable risk

Back

Factors common to the whole economy; also called systematic risk.

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diversifiable risk

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The chance that there will be a change in the price of a security attributable to issues specific to that firm: nonmarket risk. In contrast, non-diversifiable risk refers to systematic or market risk.

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minimum-variance portfolio

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The selection of risky assets with lowest variance.

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portfolio opportunity set

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The expected return–standard deviation pairs of all portfolios that can be constructed from a given set of assets.

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optimal risky portfolio

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An investor’s best combination of risky assets to be mixed with safe assets to form the complete portfolio.

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minimum-variance frontier

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Graph of the lowest possible portfolio variance that is attainable for a given portfolio expected return.