Term Answer Description Risk A. The risk of an asset when it is the only asset in an investor’s portfolio. Expected rate of return B. That portion of an investment’s risk calculated as the difference between its total risk and its firm-specific risk. Beta coefficient C. This model determines the appropriate required return on a security as the sum of the market’s risk-free rate and a risk premium based on the market’s risk premium and the security’s beta coefficient. Market risk D. The portion of an asset’s total expected return required by investors as compensation for assuming the additional risks associated with the security, the issuer, and the marketplace. Correlation coefficient (rho) E. A measure of the sensitivity of a security’s returns to fluctuations in the return earned by the market portfolio. Stand-alone risk F. The potential for variability in the possible outcomes associated with an investment. Risk premium G. The mean of the probability distribution of an investment’s possible returns, and the return expected to be realized from owning it. Diversification H. A measurement of the tendency of two variables to move together. Capital Asset Pricing Model I. The condition of price stability that results from the equality of a security’s expected and required returns. Equilibrium J. The practice of creating a portfolio of assets for the purpose of reducing the stand-alone risk of the individual assets in the portfolio.