Capital Market Line, CML

Definition Capital market line (CML) is a graph that reflects the expected return of a portfolio consisting of all possible proportions between the market portfolio and a risk-free asset. The market portfolio is completely diversified,… Read more

Security Market Line, SML

Definition The security market line (SML) is a visual representation of the capital asset pricing model or CAPM. It shows the relationship between the expected return of a security and its risk measured by its… Read more

Capital Asset Pricing Model, CAPM

Definition The capital asset pricing model (CAPM) is the equation that describes the relationship between the expected return of a given security and systematic risk as measured by its beta coefficient. Besides risk the model… Read more

Beta Coefficient

Definition Beta coefficient is a measure of the systematic risk of a security or a portfolio compared with the market as a whole. It is widely used in portfolio theory and namely in capital asset… Read more

Covariance of Returns

Definition In statistics, covariance is a metric used to measure how one random variable moves in relation to another random variable. In investment, covariance of returns measures how the rate of return on one asset… Read more

Standard Deviation of Portfolio

Definition Standard deviation of portfolio return measures the variability of the expected rate of return of a portfolio. Its value depends on three important determinants. Proportion of each asset in the portfolio. Standard deviation of… Read more

Standard Deviation of Return

Definition Standard deviation is a metric used in statistics to estimate the extent by which a random variable varies from its mean. In investing, standard deviation of return is used as a measure of risk.… Read more

Variance of Return

Definition Variance is a metric used in statistics to estimate the squared deviation of a random variable from its mean value. In portfolio theory, the variance of return is the measure of risk inherent in… Read more

Expected Rate of Return

Definition The expected rate of return is a percentage return expected to be earned by an investor during a set period of time, for example, year, quarter, or month. In other words, it is a… Read more

Efficient Market Hypothesis

Definition In the 1960s, Eugene F. Fama and Paul A. Samuelson independently suggested the efficient market hypothesis (EMH). This theory implies that all available information is already reflected in stock prices. Therefore, it is impossible… Read more