The following terms are also useful in understanding the measures of portfolio returns and risks:

  • Risk premium- The risk premium is the higher return that is expected for taking on the greater risk associated with investing in a growth stock versus a stock from a more established company.
     
  • Expected return - Since the expected return is the average of the probability of possible rates of return, it is by no means a guaranteed rate of return. However, it can be used to forecast the future value of a portfolio and provides a guide from which to measure actual returns. It is an integral component of the capital asset pricing model, which calculates the expected return based on the premium of the market rate over the risk-free return as well as the risk of the investment relative to the market as a whole (beta).
     
  • Benchmark portfolios - A common way to evaluate portfolio returns is to compare them to a benchmark such as an index. These are the most common benchmarks:


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