| beta | A measure of the sensitivity of a security's return to movements in an underlying factor. It is a measured systematic risk.
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| capital-asset-pricing model | An equilibrium asset pricing theory that shows that equilibrium rates of expected return on all risky assets are a function of their covariance with the market portfolio.
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| capital market line | The efficient set of all assets, both risky and riskless, which provides the investor with the best possible opportunities.
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| characteristic line | The line relating the expected return on a security to different returns on the market.
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| correlation | A standardized statistical measure of the dependence of two random variables. It is defined as the covariance divided by the standard deviations of two variables.
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| covariance | A statistical measure of the degree to which random variables move together.
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| diversifiable (unique) (unsystematic) risk | A risk that specifically affects a single asset or a small group of assets.
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| efficient set (efficient frontier) | Graph representing a set of portfolios that maximize expected return at each level of portfolio risk.
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| homogeneous expectations | Idea that all individuals have the same beliefs concerning future investments, profits, and dividends.
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| market portfolio | In concept, a value-weighted index of all securities. In practice, it is an index, such as the S&P 500, that describes the return of the entire value of the stock market, or at least the stocks that make up the index. A market portfolio represents the average investor's return.
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| opportunity (feasible) set | The possible expected return—standard deviation pairs of all portfolios that can be constructed from a set of assets.
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| portfolio | Combined holding of more than one stock, bond, real estate asset, or other asset by an investor.
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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.
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| security market line | A straight line that shows the equilibrium relationship between systematic risk and expected rates of return for individual securities. According to the SML, the excess return on a risky asset is equal to the excess return on the market portfolio multiplied by the beta coefficient.
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| separation principle | The principle 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 (market) risk | Any risk that affects a large number of assets, each to a greater or lesser degree.
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