Stephen A. Ross,
Massachusetts Institute of Technology
Randolph W. Westerfield,
University of Southern California
Bradford D. Jordan,
University of Kentucky
Gordon S. Roberts,
York University
| Arbitrage Pricing Theory (APT) | An equilibrium asset pricing theory that is derived from a factor model by using diversification and arbitrage. It shows that the expected return on any risky asset is a linear combination of various factors.
(See Refer to page 443)
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| Beta Coefficient | Amount of systematic risk present in a particular risky asset relative to an average risky asset.
(See Refer to page 430)
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| Capital Asset Pricing Model (CAPM) | Equation of the SML showing relationship between expected return and beta.
(See Refer to page 440)
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| Cost of Capital | The minimum required return on a new investment.
(See Refer to page 443)
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| Expected Return | Return on a risky asset expected in the future.
(See Refer to page 409)
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| Market Risk Premium | Slope of the SML, the difference between the expected return on a market portfolio and the risk-free rate.
(See Refer to page 440)
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| Portfolio | Group of assets such as stocks and bonds held by an investor.
(See Refer to page 413)
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| Portfolio Weight | Percentage of a portfolio's total value in a particular asset.
(See Refer to page 413)
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| Principle of Diversification | Principle stating that spreading an investment across a number of assets eliminates some, but not all, of the risk.
(See Refer to page 427)
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| Security Market Line (SML) | Positively sloped straight line displaying the relationship between expected return and beta.
(See Refer to page 440)
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| Systematic Risk | A risk that influences a large number of assets. Also market risk.
(See Refer to page 424)
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| Systematic Risk Principle | Principle stating that the expected return on a risky asset depends only on that asset's systematic risk.
(See Refer to page 430)
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| Unsystematic Risk | A risk that affects at most a small number of assets. Also unique or asset-specific risks.
(See Refer to page 424)
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2002 McGraw-Hill Higher Education