| diversifiable risk | Risk attributable to firm-specific risk, or nonmarket risk. Nondiversifiable risk refers to systematic or market risk.
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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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| efficient frontier of risky assets | Graph representing a set of portfolios that maximize expected return at each level of portfolio risk.
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| firm-specific risk | See diversifiable risk.
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| input list | List of parameters such as expected returns, variances, and covariances necessary to determine the optimal risky portfolio.
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| insurance principle | 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 | Market risk is risk attributable to common macroeconomic factors. Firm-specific risk reflects risk peculiar to an individual firm that is independent of market risk.
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| minimum-variance frontier | Graph of the lowest possible portfolio variance that is attainable for a given portfolio expected return.
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| minimum-variance portfolio | The portfolio of risky assets with lowest variance.
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| nondiversifiable risk | See systematic risk.
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| nonsystematic risk | Nonmarket or firm-specific risk factors that can be eliminated by diversification. Also called unique risk or diversifiable risk. Systematic risk refers to risk factors common to the entire economy.
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| optimal risky portfolio | An investor's best combination of risky assets to be mixed with safe assets to form the complete portfolio.
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| portfolio opportunity set | The expected return–standard deviation pairs of all portfolios that can be constructed from a given set of assets.
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| reward-to-variability ratio | Ratio of a portfolio's risk premium to its standard deviation.
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| separation property | The property that portfolio choice can be separated into two independent tasks: (1) determination of the optimal risky portfolio, which is a purely technical problem, and (2) the personal choice of the best mix of the risky portfolio and the risk-free asset.
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| systematic risk | Market risk is risk attributable to common macroeconomic factors. Firm-specific risk reflects risk peculiar to an individual firm that is independent of market risk.
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| unique risk | See diversifiable risk.
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