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Risk Averse

What Does Risk Averse Mean?


A description of an investor who, when faced with two investments with a similar expected return (but
different risks), will prefer the one with the lower risk.

Investopedia explains Risk Averse


A risk-averse investor dislikes risk, and therefore will stay away from adding high-risk stocks or
investments to their portfolio and in turn will often lose out on higher rates of return. Investors looking for
"safer" investments will generally stick to index funds and government bonds, which generally have lower
returns.

risk appetite -the desire for risk

Risk Tolerance

What Does Risk Tolerance Mean?


The degree of uncertainty that an investor can handle in regard to a negative change in the value of his or
her portfolio.

Investopedia explains Risk Tolerance


An investor's risk tolerance varies according to age, income requirements, financial goals, etc. For
example, a 70-year-old retired widow will generally have a lower risk tolerance than a single 30-year-old
executive, who generally has a longer time frame to make up for any losses she may incur on her
portfolio.

Systematic Risk

What Does Systematic Risk Mean?


The risk inherent to the entire market or entire market segment.

Also known as "un-diversifiable risk" or "market risk."


Investopedia explains Systematic Risk
Interest rates, recession and wars all represent sources of systematic risk because they affect the entire
market and cannot be avoided through diversification. Whereas this type of risk affects a broad range of
securities, unsystematic risk affects a very specific group of securities or an
individual security. Systematic risk can be mitigated only by being hedged.
Unsystematic Risk

What Does Unsystematic Risk Mean?


Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk
can be reduced through appropriate diversification.

Also known as "specific risk", "diversifiable risk" or "residual risk".

Investopedia explains Unsystematic Risk


For example, news that is specific to a small number of stocks, such as a sudden strike by the employees
of a company you have shares in, is considered to be unsystematic risk.
Arbitrage Pricing Theory - APT

What Does Arbitrage Pricing Theory - APT Mean?


An asset pricing model based on the idea that an asset's returns can be predicted using the relationship
between that same asset and many common risk factors. Created in 1976 by Stephen Ross, this theory
predicts a relationship between the returns of a portfolio and the returns of a single asset through a linear
combination of many independent macro-economic variables.

Investopedia explains Arbitrage Pricing Theory - APT


The arbitrage pricing theory (APT) describes the price where a mispriced asset is expected to be. It
is often viewed as an alternative to the capital asset pricing model (CAPM), since the APT has more
flexible assumption requirements. Whereas the CAPM formula requires the market's expected return,
APT uses the risky asset's expected return and the risk premium of a number of macro-economic factors.
Arbitrageurs use the APT model to profit by taking advantage of mispriced securities. A mispriced security
will have a price that differs from the theoretical price predicted by the model. By going short an
over priced security, while concurrently going long the portfolio the APT calculations were based on, the
arbitrageur is in a position to make a theoretically risk-free profit.

Capital Asset Pricing Model - CAPM

What Does Capital Asset Pricing Model - CAPM Mean?


A model that describes the relationship between risk and expected return and that is used in the pricing of
risky securities.
The general idea behind CAPM is that investors need to be compensated in two ways: time value of
money and risk. The time value of money is represented by the risk-free (rf) rate in the formula and
compensates the investors for placing money in any investment over a period of time. The other half of
the formula represents risk and calculates the amount of compensation the investor needs for taking
on additional risk. This is calculated by taking a risk measure (beta) that compares the returns of the
asset to the market over a period of time and to the market premium (Rm-rf).

Investopedia explains Capital Asset Pricing Model - CAPM


The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security
plus a risk premium. If this expected return does not meet or beat the required return, then the investment
should not be undertaken. The security market line plots the results of the CAPM for all different risks
(betas).

Using the CAPM model and the following assumptions, we can compute the expected return of a stock in
this CAPM example: if the risk-free rate is 3%, the beta (risk measure) of the stock is 2 and the expected
market return over the period is 10%, the stock is expected to return 17% (3%+2(10%-3%)).

Security Market Line - SML

What Does Security Market Line - SML Mean?


A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and
shows all risky marketable securities.

Also refered to as the "characteristic line".

Investopedia explains Security Market Line - SML


The SML essentially graphs the results from the capital asset pricing model (CAPM) formula. The x-axis
represents the risk (beta), and the y-axis represents the expected return. The market risk premium is
determined from the slope of the SML.

The security market line is a useful tool in determining whether an asset being considered for a portfolio
offers a reasonable expected return for risk. Individual securities are plotted on the SML graph. If the
security's risk versus expected return is plotted above the SML, it is undervalued because the investor
can expect a greater return for the inherent risk. A security plotted below the SML is overvalued because
the investor would be accepting less return for the amount of risk assumed.
AUD/USD (Australian Dollar/U.S. Dollar)

What Does AUD/USD (Australian Dollar/U.S. Dollar) Mean?


The abbreviation for the Australian dollar and U.S. dollar (AUD/USD) currency pair or cross. The currency
pair tells the reader how many U.S. dollars (the quote currency) are needed to purchase one Australian
dollar (the base currency)

Trading the AUD/USD currency pair is also known as trading the "Aussie".

Investopedia explains AUD/USD (Australian Dollar/U.S. Dollar)


The value of the AUD/USD pair is quoted as 1 Australian dollar per X U.S. dollars. For example, if the pair
is trading at 1.50 it means that it takes 1.5 U.S. dollars to buy 1 Australian dollar.

The AUD/USD is affected by factors that influence the value of the Australian dollar and/or the U.S. dollar
in relation to each other and other currencies. For this reason, the interest rate differential between the
Reserve Bank of Australia (RBA) and the Federal Reserve (Fed) will affect the value of these currencies
when compared to each other. When the Fed intervenes in open market activities to make the U.S. dollar
stronger, for example, the value of the AUD/USD cross could decline, due to a strengthening of the U.S.
dollar when compared to the Australian dollar.

The AUD/USD tends to have a negative correlation with the USD/CAD, USD/CHF and USD/JPY pairs
because the AUD/USD is quoted in U.S. dollars, while the others are not. The correlation with USD/CAD
could also be due to the positive correlation of the Canadian dollar and the Australian dollar (because
they both have similar economic structures because they are both resource-based economies).