Risk & Return
The vocabulary for how much you can lose, how much you should expect to make, and how the two are measured.
15 terms in this unit.
Systematic Risk (Market Risk)
Risk affecting the whole market that diversification cannot remove.
Unsystematic Risk (Specific Risk)
Company- or industry-specific risk that diversification can eliminate.
Beta
How much a security moves relative to the overall market.
Alpha
Return above what the portfolio's risk exposure would predict.
Standard Deviation
How widely returns disperse around their average.
Sharpe Ratio
Excess return per unit of total volatility.
Correlation
How closely two assets move together, from -1 to +1.
Diversification
Spreading capital across assets so no single failure is fatal.
Maximum Drawdown
The largest peak-to-trough decline over a period.
Sequence of Returns Risk
The risk that poor early returns in retirement permanently damage a portfolio.
Inflation Risk (Purchasing Power Risk)
The risk that returns fail to keep pace with rising prices.
Interest Rate Risk
The risk that rising rates push existing bond prices down.
Credit Risk (Default Risk)
The risk a borrower fails to make promised payments.
Liquidity Risk
The risk you cannot exit at a fair price when you need to.
Risk Tolerance vs. Risk Capacity
Willingness to bear loss versus financial ability to absorb it.