Probability distribution of expected returns
The MPT assumption that an investor views each investment alternative not as a single number but as a set of possible returns with probabilities over a holding period.
This one is not written up yet
The definition above is the short version. A full explanation — how it works, a worked example and the exam traps — is still being written. In the meantime the chapter below covers it in context.
Written up from the same chapter
- DiversificationSpreading an exposure across holdings that do not move together, so that total risk falls by more than total return does — minimising risk per unit of return.
- Modern Portfolio TheoryMarkowitz's framework for building portfolios on expected return and risk together, in which the co-movement between holdings — not their individual riskiness — decides the risk of the whole.
- Risk premiumThe extra return an investor demands over the nominal risk-free rate as compensation for uncertainty about future cash flows — the last and largest block in the required rate of return.
- Standard deviationA measure of how far returns typically stray from their own average — the standard statistic for total risk, counting company-specific and market-wide causes alike.
Where this is taught
Free preparation for NISM Series X-A← All terms