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Risk and Diversification definitions

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  • Diversification
    A strategy involving holding a variety of investments to reduce exposure to risks unique to individual assets.
  • Firm-Specific Risk
    Uncertainty affecting only a single company, often due to factors like competition or customer changes.
  • Market Risk
    Uncertainty impacting the entire financial system, such as recessions or wars, which cannot be avoided by spreading investments.
  • Treasury Bills
    Short-term government securities considered nearly free of default risk, often used as a benchmark for safe returns.
  • Rate of Return
    A measure calculated by dividing investment income, such as dividends or interest, by the purchase price.
  • Dividends
    Payments made to shareholders from a company's profits, representing a portion of the income earned from owning stock.
  • Capital Gains
    Profits realized from selling an asset at a higher price than its purchase cost, contributing to investment returns.
  • Interest
    Earnings received from lending money or holding bonds, typically paid at regular intervals.
  • Efficient Market Hypothesis
    A theory stating that asset prices reflect all publicly available information, making future price movements unpredictable.
  • Informational Efficiency
    A market condition where prices instantly incorporate all relevant public data, leaving no advantage for informed trading.
  • Random Walk
    A pattern where asset prices move unpredictably due to the arrival of unforeseen information.
  • Speculation
    Engagement in high-risk investments with the hope of profiting from short-term market fluctuations.
  • Economic Bubble
    A situation where asset prices inflate rapidly due to excessive demand and optimism, often followed by a sharp decline.
  • FOMO
    A psychological driver in markets where investors buy assets out of fear of missing potential gains seen by others.
  • Recession
    A significant decline in economic activity across the market, often leading to widespread drops in asset values.