Ch 02: Assignment - Risk and Return: Part 1 2. Basic concepts Aa Aa E Match the terms relating to the basic terminology and concepts of risk and rates of return on the left with the descriptions of the terms on the right. Read each description carefully and type the letter of the description in the Answer column next to the correct term. These are not necessarily complete definitions, but there is only one possible answer for each term. Risk B. Expected rate of return Beta coefficient O C. The potential for variability in the possible outcomes associated with an investment. The general term that describes the portion of an asset's total expected return that is greater than the return earned on the market's risk-free rate. The name given to the risk that cannot be diversified away by adding additional assets to an investment portfolio since it results from the systematic events and factors that affect all investments. The mean of the probability distribution of an investment's possible returns, and the return expected to be realized from owning it. This model determines the appropriate required return on a security as the sum of the market's risk-free rate and a risk premium based on the market's risk premium and the security's beta coefficient. The result of adding additional assets to a portfolio, when the returns of the individual assets are non-correlated. Market risk D. Correlation coefficient (P) Stand-alone risk Risk premium H. 1. Diversification Capital Asset Pricing Model Equilibrium A measure of the extent to which the returns on a given investment are correlated with the returns of a market portfolio. The risk of an asset when it is the only asset in an investor's portfolio The condition in which the expected return on a security equals its required return, and there is no pressure on its price to change. The value of this ranges from +1.0, denoting that two variables move up and down in perfect synchronization to -1.0, denoting that two variables move up and down in exactly opposite directions