Page 86 - CAPE Financial Services Syllabus Macmillan_Neat

WORDS/TERMS DEFINITIONS/MEANINGS
Real Interest Rate
Regulation Reflects the purchasing power of promised payments. It is usually
Reserves derived from adjusting the nominal interest to gauge for inflation.
Resident (domicile)
Risk (Systematic and It is a principal rule or law designed to control or govern conduct in
Unsystematic) business transactions.

Risk Aversed These are amounts that are retained in the business and not distributed
Risk-Free Rate to the owners.
Risk Loving (tolerant)
Risk Neutral Lawful permanent resident in a territory.

Risk Management Risk is a measure of the uncertainty of the rate of return. Systematic risk
Risk Premium is market risk and cannot be eliminated through diversification.
Risk Sharing Unsystematic risk is specific to the firm or industry and can be eliminated
Securities through diversification.
Sharpe Ratio
SML Unwillingness to take on risk. An investor who is risk averse will always
choose the investment with the lowest risk.

The rate of return provided by government securities on an investment
with zero risk. The securities are not subject to default risk.

An attribute of an investor that is always willing to take on more risk for
higher rewards.

Given two risky assets A and B. Given an initial investment of $100 asset
A will provide a return of $120 will a probability of 80% and asset B will
provide a return of $200 with a probability of 50%. A risk neutral investor
would be indifferent between risky assets A and

Risk management is the process of identification, analysis and either
acceptance or mitigation of uncertainty in investment decision-making.

The difference between the expected market return on an investment
and the risk free rate.

This is the process of creating and selling assets with risk characteristics
that matches the needs of investors

This is a claim on the issuer’s assets and or future income.

A measure for calculating the risk-adjusted return.

(A value that can be calculated). The security market line is the
representation of the capital asset pricing model. It displays the
expected rate of return of an individual security as a function of
systematic, non-diversifiable risk (its beta). Also referred to as the
"characteristic line".

CXC A38/U2/16 81