| certainty equivalent rate | The certain return providing the same utility as a risky portfolio.
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| correlation coefficient | A statistic in which the covariance is scaled to a value between minus one (perfect negative correlation) and plus one (perfect positive correlation).
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| covariance | A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns move together. A negative covariance means they vary inversely.
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| diversification | Spreading a portfolio over many investments to avoid excessive exposure to any one source of risk.
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| expected return | The probability-weighted average of the possible outcomes.
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| hedging | Investing in an asset to reduce the overall risk of a portfolio.
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| indifference curve | A curve connecting all portfolios with the same utility according to their means and standard deviations.
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| mean-variance (M-V) criterion | The selection of portfolios based on the means and variances of their returns. The choice of the higher expected return portfolio for a given level of variance or the lower variance portfolio for a given expected return.
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| risk averse | A risk-averse investor will consider risky portfolios only if they provide compensation for risk via a risk premium. A risk-neutral investor finds the level of risk irrelevant and considers only the expected return of risk prospects. A risk lover is willing to accept lower expected returns on prospects with higher amounts of risk.
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| risk lover | See risk averse.
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| risk neutral | See risk averse.
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| risk premium | An expected return in excess of that on risk-free securities. The premium provides compensation for the risk of an investment.
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| standard deviation | Square root of the variance.
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| utility | The measure of the welfare or satisfaction of aninvestor.
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| variance | A measure of the dispersion of a random variable. Equals the expected value of the squared deviation from the mean.
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