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Define the following terms, using graphs or equations to illustrate your answers wherever feasible:

a. Stand-alone risk; risk; probability distribution

b. Expected rate of return, r

c. Continuous probability distribution

d. Standard deviation, variance, 2; coefficient of variation, CV

e. Risk aversion; realized rate of return, r

f. Risk premium for Stock i, RPi; market risk premium, RPM

g. Capital Asset Pricing Model (CAPM)

h. Expected return on a portfolio, ˆ rp; market portfolio

i. Correlation coefficient, ; correlation

j. Market risk; diversifiable risk; relevant risk

k. Beta coefficient, b; average stock’s beta, bA

l. Security Market Line (SML); SML equation

m. Slope of SML as a measure of risk aversion

The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks. The CAPM is a model for pricing an individual security or portfolio. For individual securities, we make use of the security market line (SML) and its... Expected Return

The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...

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