CFA #1 Flashcards
A priori probability
A probability based on logical analysis rather than on observation or personal judgement.
Abandonment option
The ability to terminate a project at some future time if the finaicial results are dissapointing.
Abnormal return
The amount by which a security’s actual return differs from its expected return, given the security’s risk and market’s return.
Above full-employment equilibrium
A macroeconomic equilibrium in which real GDP exceeds potential GDP.
Absolute dispersion
The amount of variability present without comparison to any reference point of benchmark.
Absolute frequency
The number of observations in a given interval (for grouped data).
Accelerated book build
An offering of securities by an investment bank acting as principal that is accomplished in only one or two ways.
Accelerated methods of depreciation
Depreciation methods that allocate a relatively large proportion of the cost of an asset to the early years of the asset’s useful life.
Account
With the accounting systems, a formal record of increases and decreases in a specific asset, liability, component of owners’ equity, revenue, or expense.
Account format
A method of presentation of accounting transactions in which effects on assets appear at the left and effects on liablities and equity appear at the right of a central dividing line; also known as T-account format.
Accounting profit (income before taxes or pretax income)
Income as reported on the income statement, in accordance with prevailing accounting standards, before the provisions for income tax expense.
Accounting risk
The risk associated with accounting standards that vary from country to country or with any uncertainty about how certain transactions should be recorded.
Accounts payable
Amounts that a business owes to it’s vendors for goods and sevices that were purchases from them but which have not yet been paid.
Accounts receivable turnover
Ratio of sales on credit to the average balance in accounts receivable.
Accrual basis
Method of accounting in which the effect of transactions on financial condition and income are recorded when they occur, not when they are settled in cash.
Accrued expenses (accrued liabilities)
Liabilities related to expenses that have been incurred but not yet paid as of the end of an accounting period–an example of an accrued expense is rent that has been incurred but not yet paid, resulting in a liability “rent payable.”
Accrued interest
Interested earned but not yet paid.
Accumulated benefit obligation
Under U.S. GAAP, a measure used in estimating a defined-benefit pension plan’s liabitlies, defined as “the actuarial present value of benefits (whether vested or non-vested) attributed by the pension benefit formula to employee service rendered before a specified date and based on employee service and compensation (if aplicable) prior to that date.”
Accumulated depreciation
An offset to property, plant, and equipment (PPE) reflecting the amount of the cost of PPE that has been allocated to current and previous accounting periods.
Acquiring company, or acquirer
The company in a merger or acquisition that is acquiring the target.
Acquisition
The purchase of some portion of one company by another; the purchase may be for asssets, a definable segment of another entity, or the puchase of an entire company.
Acquisition method
A method of accoounting for a business combination where the acquirer is required to measure each identifiable asset and liability at fair value. This method was the result of a joint project of the IASB and FASB aiming at convergence in standards for the accounting of business combinations.
Active factor risk
The contribution to active risk squared resulting from the portfolio’s different-than-benchmark exposures relative to factors specified in the risk model.
Active investment
An approach to investing in which the investor seeks to outperform a given benchmark.
Active return
The return on a portfolio minus the return on the portfolio’s benchmark.
Active risk
The standard deviation of active returns.
Active risk squared
The variance of active returns; active risk raised to the second power.
Active specific risk or asset selection risk
The contribution to active risk squared resulting from the portfolio’s active weights on individual assets as those weights interact with assets’ residual risk.
Active strategy
In reference to short-term cash management, an investment strategy characteriezd by monitoring and attempting to capitalize on market conditions to omptimize the risk and return relationship of short-term investments.
Activity ratios (asset utlization or operating efficiency ratios)
Ratios that measure how efficiently a company performs day-to-day tasks, such as the collection of receivables and management of inventory.
Addition rule for probabilities
A principle stating that the probability that A or B occurs (both occur) equals the probability that A occurs, plus the probability that B occurs, minus the probablity that both A and B occur.
Add-on interest
A procedure for determining the interest on a bond or loan in which the interest is added onto the face value of the contract.
Adjusted beta
Historical beta adjusted to reflect the tendency of beta to be mean reverting.
Adjusted R2
A measure of goodness-of-fit of a regression that is adjusted for degrees of freedom and hence does not automatically increase when another independent variable is added to a regression.
Agency costs
Costs associated with the conflict of interest present when a company is managed by non-owners. Agency costs result from the inherent conflicts of interest between managers and equity owners.
Agency costs of equity
The smaller the stake that managers have in the company, the less is their share in bearing the cost of excessive perquisite consumption or not giving their best efforts in running the company.
Agency problem, or principal-agent problem
A conflict of interest that arises when the agent in an agency relationship has goals and incentives that differ from the principal to whom the agent owes a fiduciary dity.
Agency relationships
An arrangement whereby someone, an agent, acts on behalf of another person, the principal.
Aggregate demand
The relationship between the quantity of real GDP demanded and the price level.
Aggregate hours
The total number of hours worked by all the people employed, both full time and part time, during a year.
Aging schedule
A breakdown of accounts into categories of days outstanding.
Allocationally efficient
Said of a market, a financial system, or an economy that promotes the allocation of resources to their highest value uses.
All-or-nothing (AON) orders
An order that includes the instruction to trade only if the trade fills the entire quantity (size) specified.
Allowance for bad debts
An offset to accounts receivable for the amount of accounts receivable that are estimated to be uncollectible.
Alternative hypothesis
The hypothesis accepted when the null hypthesis is rejected.
Alternative invesment markets
Market for investments other than traditional securities investments (i.e., traditional common and preferred shares and traditional fixed income instruments). The term usually encompasses direct and indirect investment in real estate (including timberland and farmland) and commodities (including precious metals); hedge funds, priate equity, and other investments requiring specialized due diligence.
Alternative trading systems (electronic communications networks or multilateral trading facilities)
Trading venues that function like exchanges but that do not exercise regulatory authority over their subscribers except with respect to the conduct of the subscribers’ trading in their trading systems.
American depository shares
The underlying shares on which American depository receipts are based. They trade in the issuing company’s domestic market.
American depsository receipt
A U.S dollar-denominated secuirity that trades like a commons hare on the U.S. exchanges.
American option
An option that can be exercised at any time until its expiration date.
Amortization
The process of allocating the cost of intangible long-term assets having a finite useful life to accounting periods; the allocation of the amount of a bond premium or discount to the periods remaining until bond maturity.
Amortizing and accreting swaps
A swap in which the notional principal changes according to a formula related to changes in the underlying.
Analysis or variable (ANOVA)
The analysis of the total variability of a dataset (such as observations on a dependent variable in a regression) into components representing different sources of variation; with preference to regression, ANOVA provides the inputs for an F-terst of the significance of the regression as a whole.
Annual percentage rate
The cost of borrowing expressed as a yearly rate.
Annuity
A finite set of level sequential cash flows.
Annuity due
An annuity having a first cash flow that is paid immediately.
Anticipation stock
Excess inventory that is held in anticipation of increased demand, often because of seasonal patters of demand.
Antidilutive
With reference to a transaction or a security, one that would increase earnings per shares (EPS) or result in EPS higher than the company’s basic EPS–antidilutive securities are not included in the calculation of diluted EPS.
Arbitrage
1) The simultaneous purchase of an undervalued asset or portfiolio and sale of an overvalued but equivalent asset or portfolio, in order to obtain a riskless profit on the price differential. Taking advantage of a market inefficiency in a risk-free manner. 2) The condition in a financial market in which equivalent assets or combinations of assets sell for two diffeerent prices, creating an opportunity to profit at no risk with no commitment of money. In a well-functioning financial market, few arbitrage opportunties are possible. 3) A risk-free operation that earns an expected positive net profit but requires no net investment of money.
Arbitrage opportunity
An opportunity to conduct an arbitraage; an opportunity to earn an expected positive net profit without risk and with no net investment of money.
Arbitrage portfolio
The portfolio that exploits an arbitrage opportunity.
Arithmetic mean
The sum of the observations divided by the number of observations.
Arms index, also called TRIN
A flow of funds indicator applied to a broad stock market index to measure the relative extent to which money is moving into or out of rising and declining stocks.
Arrears swap
A type of interest rate swap in which the floating payment is set at the end of the period and the interest is paid at that same time.
Asian call option
A European-style option with a value at maturity equal to the difference between the stock price at maturity and the average stock price during the life of the option, or $0, whichever is greater.
Ask (offer)
The price at which a dealer or trader is willing to sell an asset, typically qualified by a maximum quantity (ask size).
Ask size
The maximum quantity of an asset that pertains to a specific ask price from a trader. For example, if the ask for a share issue is $30 for a size of 1,000 shares, the trader is offering to sell at $30 up to 1,000 shares.
Asset allocation
The process of determining how investment funds should be distributed among asset classes.
Asset beta
The unlevered beta; reflects the business risk of the assets; the asset’s systematic risk.
Asset class
A group of assets that have similar characteristics, attributes, and risk/return relationships.
Asset purchase
An acquisition in which the acquirer pruchases the target company’s asset and payment is made directly to the target company.
Asset retirement obligations (AROs)
The fair value of the estimated costs to be incurred at the end of a tangible asset’s service life. The fair value of the liability is determined on the basis of discounted cash flows.
Asset-based loan
A loan that is secured with company assets.
Asset-based valuation models
Valuation based on estimates of the market value of a company’s assets.
Assets
Resources controlled by an enterpricse as a result of past events and from which future economic benefits to the enterprise are expected to flow.
Assignment of accounts receivable
The use of accounts receivable as collateral for a loan.
Asymmetric information
The differential of information between corporate insiders and outsiders regarding the company’s performance and prospects. Managers typically have more information about the company’s performance and prospects than owners and creditors.
At the money
An option in which the underlying value equals the exercise price.
Autocorrelation
The correlation of a time series with its own past values.
Automated Clearing House
An electronic payment network available to businesses, individuals, and financial institutions in the United States, U.S. Territories, and Canada.
Automatic fiscal policy
A fiscal policy action that is triggered by the state of the economy.
Automatic stabilizers
Mechanisms that stabilize real GDP without explicit action by the government.
Autonomous tax multiplier
The maginification effect of a change in taxes on aggregate demand.
Autoregressive (AR) model
A time series regressed on its own past values, in which the independent variable is a lagged value of the dependent varable.
Available-for-sale investments
Debt and equity securities not classified as either held-to-maturity or held-for-trading securities. The investor is willing to sell but not actively planning to sell. In general, available-for-sale securities are reported at fair value on the balance sheet.
Average cost pricing rule
A rule that sets price to cover cost including normal profit, which means setting the price equal to average total cost.
Average fixed cost
Total fixed cost per unit of output.
Average product
The average product of a factor of production. It equals total product divided by the quantity of the factor employed.
Average total cost
Total cost per unit of outputs.
Averiage variable cost
Total variable cust per unit of output.
Backtesting
With reference to portfolio strategies, the application of a strategy’s portfolio selection rules to historical data to assess what would have been the strategy’s historical performance.
Backward integration
A merger involving the purchase of a target ahead of the acquirer in the value or production chain; for example, to acquire a supplier.
Backwardation
A condition in the futures markets in which the benefits of holding an asset exceed the costs, leaving the futures price less than the spot price.
Balance sheet (statement of financial position or statement of financial condition)
The financial statement that presents an entity’s current financial position by disclosing resources the entity controls (its assets) and the claims on those resources (its liabilities and equity claims), as of a partuclar point in time (the date of the balance sheet).
Balance sheet ratios
Financial ratios involving balance sheet items only.
Balanced budget
A government budget in which tax revenues and outlays are equal.
Balanced budget multiplier
The magnification effect on aggregate demand of a simultaneous change in government expenditure and taxes that leaves the budget balanced.
Balance-sheet-based accruals ratio
The difference between net operating assets at the end and the beginning of the period compared to the average net operating assets over the period.
Balance-sheet-based aggregate accruals
The difference between net operating assets at the end and the beginning of the period.
Bank discount basis
A quoting convention that annualizes, on a 360-day year, the discount as a percentage of face value.
Bar chart
A price chart with four bits of data for each time interval–the high, low, opening, and closing prices. A verticle line connects the high and low. A cross-hatch left indicates the opening price and coross-hatch right indicates the close.
Bargain purchase
When a company is acquired and the purchase price is less than the fair value of the net assets. The current treatment of the excess of fair value over the purchase price is different under IFRS and U.S. GAAP. The excess is never accounted for as negative goodwill.
Barriers to entry
Legal or natural contraints that protect a firm from potential competitors.
Barter
The direct exchange of one good or service for other goods and services.
Basis EPS
Net earnings available to common shareholders (i.e., net income minus preferred dividends) divided by the weighted average number of common shares outstanding.
Basis point value (BPV)
Also called present value of a basis point or price value of a basis point (PVBP), the change in the bond price for a 1 basis point change in the yield.
Basis swap
1) An interest rate swap involving two floating rates. 2) A swap in which both parties pay a floating rate.
Basket of listed depository receips
An exchange-traded fund (ETF) that represents a portfolio of depository receipts.
Bayes’ formula
A method for updating probabilities based on new information.
Bear hug
A tactic used by acquirers to circumvent target management’s objections to a proposed merger by submitting the proposal directly to the target company’s board of directors.
Bear spread
An option strategy that involves selling a put with a lower exercise price and buying a put with a higer exercise price. It can also be executed with calls.
Behavioral finance
A field of finance that examines the psychological variables that affect and often distort the investment decision making of investors, analysts, and porfolio managers.
Behind the market
Said of prices specified in orders that are worse than the best current price; e.g., for a limit buy order, a limit price below the best bid.
Below full-employment equilibrium
A macroeconomic equilibrium in which potential GDP exceeds real GDP.
Benchmark
A comparison portfolio; a point of reference or comparison.
Benchmark error
The use of an inappropriate or incorrect benchmark to assess and compare portfolio returns and management.
Benchmark prtfolio
A comparison portfolio or index that represents the persistent and prominent investment characteristics of the securities in an actual portfolio.
Bernoulli random variable
A random variable having the outcomes 0 and 1.
Bernoulli trial
An experiment that can product one of two outcomes.
Best bid
The highest bid in the market.
Best efforts offering
An offering of a security using an investment bank in which the investment bank, as agent for the issuer, promises to use its best efforts to sell the offering but does not guarantee that a specific amount will be sold.
Best offer
The lowest offer (ask price) in the market.
Beta
A measure of systematic risk that is based on the covariance of an asset’s or portfolio’s return with the return of the overall market.
Bid (bid price)
The price at which a dealer or trader is willing to buy an asset, typically qualified by a maxiumum quantity.
Bid size
The maximum quantity of an asset that pertains to a specific bid price from a trader.
Big tradeoff
The conflit between equality and efficiency.
Bilateral monopoly
A situation in which a single seller (a molopoly) faces a single buyer (a monopsony).
Binomial model
A model of pricing options in which the underlying price can move to only one of two possible new prices.
Binomial random variable
The number fo successes in n Bernoulli trials for which the probability of success is constant for all trials and the trials are independent.
Binomial tree
The graphical representation of a model of asset price dynamics in which, at each period, the asset moves up with probability p or down with probability (1-p).
Black market
An illigal market in which the price exceeds the legally imposed price ceiling.
Block
Orders to buy or sell that are too large for the liquidity ordinarily available in dealer networks or stock exchanges.
Block brokers
A broker (agent) that provides brokerage services for large-size trades.
Blue chip companies
Widely held large market capitalization companies that are considered financially sound and are leaders in their respective industry or local stock market.
Bollinger Bands
A price-based technical analysis indicator consisting of a moving average plus a higher line representing the moving agerage plus a set number of standard deviations from the average price (for the same number of periods as used to calculate the moving average) and a lower line that is a moving average minus the same number of standard deviations.
Bond equivalent yield
A calculation of yield that is annualized using the ratio of 365 to the number of days to maturity. Bond equivalent yield allows for the restatement and comparison of securities with different compounding periods.
Bond optoin
An option in which the underlying is a bond; primarily traded in over-the-counter markets.
Bond yield plus risk premium approach
An estimate of the cost of common equity that is produced by summing the before-tax cost of debt and a risk premium that captures the additional yield on a company’s stock relative to its bonds. The additional yield is often estimated using historical spreads between bond yields and stock yields.
Bond-equivalent basis
A basis for stating an annual yield that annualizes a semiannual yield by doubling it.
Bond-equivalent yield
The yield to maturity on a basis that ignores compounding.
Bonding costs
Costs borne by management to assure owners that they are working in the owners’ best interest (e.g., implicit cost of non-compete agreements).
Book building
Investment bankers’ process of compiling a “book” or list of indications of interest to buy part of an offering.
Book value (or carrying value)
The net amount shown for an asset or liablity on the balance sheet; book value may also refer to the company’s excess of total assets over total liabilities.
Book value equity per share
The amount of book value (also called carrying value) of common equity per share of common stock, calculated by dividing the book value of shareholders’ equity by the number of shares of common stock outstanding.
Bootstrapping earnings
An increase in a company’s earnings that results as a consequence fo the idiosyncrasies of a merger transaction itself rather than because of resulting economic benefits of the combination.
Bottom-up analysis
With reference to investment selection processes, an approach that involves selection from all securities within a specified investment universe, i.e., without prior narrowing of the universe on the basis of macroeconomic or overall market considerations.
Box spread
An option strategy that combines a bull spread and a bear spread having two difffrent exercise prices, which produces a risk-free payoff of the differnece in the exercise prices.
Break point
In the context of the weighted average cost of capital (WACC), a break point is the amount of capital at which the cost of one or more of the sources of capital changes, leading to a change in the WACC.
Breakeven point
The number of units produced and sold at which the copmany’s net income is zero (revenues = total costs).
Breakup value
The value that can be achieved if a company’s assets are divided and sold seprately.
Breusch-Pagan test
A test for conditional heteroskedasticity in the error term of a regression.
Broker
1) An agent who executes orders to buy or sell securities on behalf of a client in exchange for a commission. 2) See Futures commission merchants.
Broker-dealer
A financial intermediary (often a company) that may function as a principal (dealer) or as an agent (broker) depending on the type of trade.
Brokered market
A market in which brokers arrange trades among their clients.
Budget deficit
A government’s budget balance that is negative–outlays exceed tax revenues.
Budget surplus
A government’s budget balance that is positive–tax revenues exceed oulays.
Bull spread
An option strategy that involves buying a call with a lower exercise price and selling a call with a higher exercise price. It can also be executed with puts.
Business risk
The risk associated with operating earnings. Operating earnings are uncertain because total revenues and many of the expenditures contributed to produce those revenues are uncertain.
Butterfly spread
An option strategy that combines two bull or bear spreads and has three exercise prices.
Buy side firm
An investment management company or other investor that uses the services of brokers or dealers (i.e., the client of the sell side firm).
Buyout fund
A fund that buys all the shares of a public company so that, in effect, the company becomes private.
Call
An option that gives the holder the right to buy an underlying asset from another party at a fixed price over a specific period of time.
Call market
A market in which trades occur only at a particular time and place (i.e., when the market is called).
Call money rate
The interest rate that buyers pay for their margin loan.
Callable (or redeemable) common shares
Shares that give the issuing company the option (or right), but not the obligation, to buy back the shares from investors at a call price that is specified when the shares are originally issued.
Candlestick chart
A price chart with four bits fo data for each time interval. A candle indicates the opening and closing price for the interval. The body of the candle is shaded if the opening price was higher than the closing price, and the body is clear if the opening price was lower than the closing price. Verticle lines known as wicks or shadows extend from the top and bottom fo the candle to indicate the high and low price for the interval.
Cannibalization
Cannibalization occurs when an investment takes customers and sales away from another part of the company.
Cap
1) A contract on an interest rate, whereby at periodic payment dates, the writer of the cap pays the difference between the market interest rate and a specified cap rate if, and only if, this difference is positive. This is equivalent to a stream of call options on the interest rate. 2) A combination of interest rate call options designed to hedge a barrower against rate increases on a foating-rate loan.
Capital allocation line (CAL)
A graph line that describes the combinations of expected return and standard deviation of return available to an investor from combining the optimal portfolio of risky assets with the risk-free asset.
Capital asset pricing model (CAPM)
An equation describing the expected return on any asset (or portfolio) as a linear function of its beta relative to the market portfolio.
Capital budgeting
The allocation of funds to relatively long-range projects or investments.
Capital market expectations
An investor’s expectations concerning the risk and return prospets of asset classes.
Capital market line (CML)
The line with an intercept point equal to the risk-free rate that is tangent to the efficient frontier of the risky assets; represents the efficient frontier when a risk-free aset is available for investment.
Capital markets
Financial markets that trade securities of longer duration, such as bonds and equities.
Capital rationing
A capital rationing environment assumes that the company has a fixed amount of funds to invest.
Capital structure
The mix of debt and equity that a compnay uses to finance its business; a company’s specific mixture of long-term financing.
Capitalized inventory costs
Costs of inventories including costs of purchase, costs of conversion, other costs to bring the inventories to their present location and condition, and the allocated portion of fixed production overhead costs.
Caplet
Each component call option in a cap.
Capped swap
A swap in which the floating payments have an upper limt.
Captive finance subsidiary
A wholly-owned subsidiary of a company that is established to provide financing of the sales of the parent company.
Carrying amount (book value)
The amount at which an asset or liability is valued according to accounting principles.
Cartel
A group of firms that has entered into a collusive agreement to restrict output and increase prices and profits.
Cash
In accounting contexts, cash on hand (e.g., petty cash and cash not yet deposited to the bank) and demand deposits held in banks and similar accounts that can be used in payment of obligations.
Cash basis
Accounting method in which the only relevant transactions for the financial statements are those that involve cash.
Cash conversion cycle (net operating cycle)
A financial metric that measures the length of time required for a company to convert cash invested in its operations to cash received as a result of its operations; equal to days of inventory on hand + days of sales outstanding - number of days of payables.
Cash equivalents
Very liquid short-term investments, usually maturing in 90 days of less.
Cash flow additivity priciple
The principle that dollar amounts indexed at the same point in time are additive.
Cash flow at risk (CFAR)
A variation of VAR that reflects the risk of a company’s cash flows instead of its market value.
Cash flow from operations (cash from from operating activities or operating cash flow)
The net amount of cash provided from operating activities.
Cash flow statement (statement of cash flows)
A financial statement that reconciles beginning-of-period and end-of-period balance sheet values of cash; consists of three parts: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.
Cash offering
A merger or acquisition that is to be paid for with cash; the cash for the merger might come from the acquiring company’s existing assets or from a debt issue.
Cash price or spot price
The price for immediate purchase of the underlying asset.
Cash ratio
A liquidity ratio calculated as (cash + short-term marketable investments) divided by the current liablitiles; measures a company’s ability to meet its current obligations with just the cash and cash equivalents on hand.
Cash settlement
A procedure used in certain derivative transactions that specifies that the long and short parties engage in the equivalent cash value of the delivery transaction.
Cash-flow-statement-based accruals ratio
The difference between reported net income on an accrual basis and the cash flows from operating and investing activities compared to the average net operating assets over the period.
Cash-flow-statement-based aggregate accruals
The difference between reported net income on an accrual basis and the cash flows from operating and investing activities.
CBEO Volatility Index
A measure of near-term market volatility as conveyed by S&P 500 stock index option prices.
Central bank
A bank’s bank and a public authority that regulates the nation’s depository institutions and controls the quantity of money.
Central limit theorem
A result in statistics that states that the sample mean computed from large samples of size n from a pupulation with a finite variance will follow an approximate normal distribution with a mean equal to the population mean and a variance equal to the population variance divided by n.
Centralized risk management or companywide risk management
When a copmany has a single risk maangement group that monitor and controls all of the risk-taking activities of the organization. Centralization permits economics of scale and allows a company to use some of its risks to offset other risks. (See also enterprise risk management.)
Chain rule of forecasting
A forecasting process in which the next period’s value as predicted by the forecasting equation is substituted into the righth and side of the equiation to give a predicted value two preiods ahead.
Change in polarity principle
A tenet of technical analysis that once a support level is breached, it becomes a resistance level. The same holds true for resistance levels; once breached, they become support levels.
Chart of accounts
A list of accounts used in an entity’s accounting system.
Cheapest to deliver
A bond in which the amount received for delivering the bond is largest compared with the amount paid in the market for the bond.
Cherry-picking
When a bankrupt company is allowed to enforce contracts that are favorable to it while walking away from contracts that are unfavorable to it.
Classfied balance sheet
A balance sheet organized so as to group together the various asset and liabilities into subcategories (e.g., current and noncurrent).
Classical
A macroeconomist to believes that the economys is self-regulating and that it is always at full employment.
Clean-surplus accounting
The bottom-line income reflects all changes in shareholders’ equity arising from other than owner transactions. In the absence of owner transactions, the change in shareholders’ equity should equal net income. No adjustments such as translation adjustments bypass the income statement and go directly to shareholders’ equity.
Clearing instructions
Instructions that indicate how to arrange the final settlement (“clearing”) of a trade.
Clearinghouse
An entity associated with a futures market that acts as middleman between the contracting parties and guarantees to each party the performance of the other.
Clientele effect
The preference some investors have for shares that exhibit certain characteristics.
Closed-end fund
A mutual fund in which no new investment money is accepted. New investors invest by buying existing shares, and investors in the fund liquidate by selling their shares to other investors.
Closeout netting
Netting the market values of all derivative contracts between two parties to determine one overall value owed by one party to another in the event of bankruptcy.
Coefficient of variation (CV)
The ratio of a set of observations’ standard deviation to the observations’ mean value.
Cointegrated
Describes two time series that have a long-term financial or economic relationship such that they do not diverge from each other without bound in the long run.
Collar
An option strategy involving the purchase of a put and sale of a call in which the holder of an asset gains protection below a certain level, the exercise price of the put, and pays for it by giving up gains above a certain level, the exercise price of the call. Collars also can be used to provide protection against rising interest rates on a floating-rate loan by giving up gains from lower interest rates.
Collusive agreement
An agreement between two (or more) producers to restrict output, raise the price, and increase profits.
Comand system
A method of allocating resources by the order (command) or someone in authority. In a firm a managerial hierarchy organizes production.
Combination
A listing in which the order of the listed items does not matter.
Commercial paper
Unsecured short-term corporate debt that is characterized by a single-payment at maturity.
Committed lines of credit
A bank commitment to extend credit up to a pre-specified amount; the commitment is considered a short-term liablities and is usually in effect for 364 days (one day short of a full year).
Commodity forward
A contract in which the underlying asset is oil, a precious metal, or some other commodity.
Commodity futures
Futures contracts in which the underlying is a traditional agricultural, metal, or petroleum product.
Commodity option
An option in which the asset underlying the futures is a commodity, such as oil, gold, wheat, or soybeans.
Commodity swap
A swap in which the underlying is a commodity such as oil, gold, or an agricultural product.
Common shares
A type of security that represents an ownership interest in a company.
Common size statements
Financial statements in which all elements (accounts) are stated as a percentage of a key figure such as revenue for an income statement or total assets for a balance sheet.
Common-size analysis
The restatement of financial statement items using a common denominator or reference item that allows one to identify trends and major differences; an example is an income statement in which all items are expressed as a percent of revenue.
Company analysis
Analysis of an individual company.
Company fundamental factors
Factors related to the company’s internal performance, such as factors relating to earnings growth, earnings variability, earnings momentum, and financial leverage.
Company share-related factors
Valuation measures that other factors related to share price or the trading characteristics of shares, such as earnings yield, dividend yield, and book-to-market value.
Comparable company
A company that has similar business risk; usually in the same industry and preferably with a single line of business.
Competitive strategy
A company’s plans for responding to the threats and opportunities presented by the external environment.
Complement
In probabiliy, with reference to an event S, the event that S does not aoccur; in economics, a good that is used in conjunction with another good.
Complete markets
Informally, markets in which the variety of distinct securities traded is so broad that any desired payoff in a future state-of-the-world is achievable.
Completed contract
A method of revenue recognition in which a company does not recognize any revenue until the contract is completed; used particularly in long-term construction contracts.
Component cost of capital
The rate of return required by suppliers of capital for an individual source of a company’s funding, such as debt or equity.
Compounding
The process of accumulating interest on interest.
Comprehensive income
The change in equity of a business enterprise during a period from nonowner sources; includes all changes in equity during a period except those resulting from investments by owners and distributions to owners; comprehensive income equals net income plus other comprehensive income.
Conditional expected value
The expected value of a stated event given that another event has occurred.
Conditional heteroskedasticity
Heteroskedasticity in the error variance that is correlated with the values of the independent variable(s) in the regression.
Conditional probability
The probability of an event given (conditioned on) another event.
Conditional variances
The variance of one variable, given the oucome of another.
Confidence interval
A range that has a given probability that it will contain the population parameter it is intended to estimate.
Conglomerate merger
A merger involving companies that are in unrelated businesses.
Consistency
A desirable property of estimators; a consistent estimator is one for which the probability of estimates close to the value of the population paramter increases as sample size increases.
Consistent
With reference to estimators, describes an estimator for which the probability of estimates close to the value of the population parameter increases as sample size increases.
Consolidation
A combining of the results of operation of subsidiaries with the parent company to present financial statements as if they were a single economic unit. The assets, liabilities, revenues and expenses of the subsidiaries are combined with those of the parent company, eliminating inter-company transactions.
Constant maturity swap or CMT swap
A swap in which the floating rate is the rate on a security known as a constant maturity treasury or CMT security.
Constant returns to scale
Features of a firm’s technology that lead to constant long-run average cost as output increases. When constant returns to scale are present, the LRAG curve is horizontal.
Constituent securities
With respect to an index, the in dividual securities within an index.
Consumer Price Index (CPI)
An index that measures the average of the prices paid by urban consumers for a fixed “basket” of the consumer goods and services.
Consumer surplus
The value (or marginal benefit) of a good minus the price paid for it, summed over the quantity bought.
Contango
A situation in a futures market where the current futures price is greater than the current spot price for the underlying asset.
Contant maturity treasury or CMT
A hypothetical U.S. Treasuty note with a constant maturity. A CMT exists for various years in the range of 2 to 10.
Contestable market
A market in which firms can enter and leave so easily that firms in the market face competition from potential entrants.
Contingent claims
Derivatives in which the payoffs occur if a specific event occurs; generally referred to as options.
Continuation patterns
A type of pattern used in technical analysis to predict the resumption of the market trend that was in place prior to the formation of a pattern.
Continuous market
A market where the stocks are priced and traded continuously by an auction process or by dealers when the market is open.
Continuous random variable
A random variable for which the range of possible outcomes is the real line (all real numbers between -? and +? or some subset of the real line).
Continuous time
Time thought of as advancing in extremely small increments.
Continuous trading market
A market in which trades can be arranged and executued any time the market is open.
Continuously compounded return
The natural logarithm of 1 plus the holding period return, or equivalently, the natural logarithm of the ending price over the beginning price.
Contra account
An account that offsets another account.
Contribution margin
The amount available for fixed costs and profit after paying variable costs; revenue minus variable costs.
Controlling interest
An investment where the investor exerts control over the investee, typically by having a greater than 50 percent ownership in the investee.
Convenience yield
The nonmonetary return offered by an asset when the asset is in short supply, often associated with assets with seasonal production processes.
Conventialal cash flow
A conventional cash flow pattern is one with an initial outflow followed by a series of inflows.
Convergence
In technical analysis, a term that describes the case when an indicator moves in the same manner as the security being analyzed.
Conversion factor
An adjustment used to facilitate delivery on bond futures contracts in which any of a number of bonds with different characteristics are eligible for delivery.
Convertible debt
Debt with the added feature that the bondholder has the option to exchange the debt for equity at prespecified terms.
Convertible preference shares
A type of equity security that entitles shareholders to convert their shares into a specified number of common shares.
Cooperative equilibrium
The outcome of a game in which the players make and share the monopoly profit.
Core inflation rate
A meausre of inflation based on the core CPI–the CPI excluding food and fuel.
Corporate governance
The system of principles, policies, procedures, and clearly defined responsiblities and accountabilities used by stakeholders to overcome the conflicts of interest inherent in the corporate form.
Corporate raider
A person or organization seeking to profit by acquiring a company and reselling it, or seeking to profit from the takeover attempt itself (e.g. greenmail).
Corporation
A legal entity with rights similar to those of a person. The chief officers, executives, or top managers act as agents for the firm and are legally entitled to authorize coporate activities and to enter into contracts on behalf of the business.
Correlation
A number between -1 and +1 that measures the comovement (linear association) between two random variables.
Correlation analysis
The analysis of the strength of the linear relationship between two data series.
Correlation coefficient
A number between -1 and +1 that measures the consistency or tendency for two invesetments to act in a similar way. It is used to determine the effect on portfolio risk when two assets are combined.
Cost averaging
The periodic investment of a fixed amount of money.
Cost of capital
The rate of return that suppliers of capital require as compensation for their contribution of capital.
Cost of carry
The cost associated with holding some asset, including financing, storage, and insurance costs. Any yield received on the asset is treated as a negative carrying cost.
Cost of carry model
A model for pricing futures contracts in which the futures price is determined by adding the cost of carry to the spot price.
Cost of debt
The cost of debt financing to a company, such as when it issues a bond or takes out a bank loan.
Cost of goods sold
For a given period, equal to beginning inventory minus ending inventory plus the cost of goods acquired or produced during the period.
Cost of preferred stock
The cost to a company of issuing preferred stock; the dividend yield that a company must commit to pay preferred stockholders.
Cost recovery method
A method of revenue recognition in which the seller does not report any profit until the cash amounts paid by the buyer–including pricipal and interest on any financing fom the seller–are greater than all the seller’s costs for the merchandise sold.
Cost structure
The mix of a company’s variable costs and fixed costs.
Cost-push inflation
An inflation that results from an initial increase in costs.
Council of Economic Advisers
The President’s council whose main work is to monitor the economy and keep the President and the public well informed about the current state of the economy and the best available forecasts of where it is heading.
Counterparty risk
The risk that the other party to a contract will fail to honor the terms of the contract.
Coupon rate
The interest rate promised in a contract; this is the rate used to caluclate the periodic interest payments.
Covariance
A measure of the co-movement (linear association) between two random variables.
Covariance matrix
A matrix or square array whose entries are covariances; also kown as the variance-covariance matrix.
Covariance stationary
Describes a time series when its expected value and variance are constant and finite in all periods and when its covariance with itself for a fixed number of periods in the past or future is constant and finite in all periods.
Covered call
An option strategy involving the holding of an asset and sale of a call on the asset.
Covered interest arbitrage
A transaction executed in the foreign exchange market in which a currency is purchased (sold) and a forward contract is sold (purchased) to lock in the exchange rate for future delivery of the currency. This transaction should earn the risk-free rate of the investor’s home country.
Credit
With respect to double-entry accounting, a credit records increases in liability, owners’ equity, and revenue accounts or decreases in asset accounts; with respect to borrowing, the willingness and ability of a borrower to make promised payments on the borrowing.
Credit analysis
The evaluation of credit risk; the evaluation of the creditworthiness of a borrower or counterparty.
Credit derivatives
A contract in which one party has the right to claim a payment from another party in the event that a specific credit event occurs over the life of the contract.
Credit risk or default risk
The risk of loss caused by a counterparty’s or debtor’s failure to make a promised payment.
Credit scoring model
A statistical model used to classify borrowers according to creditworthiness.
Credit spread option
An option on the yield spread on a bond.
Credit swap
A type of swap transaction used as a credit derivative in which one party makes periodic payments to the other and receives the promise of a payoff if a third party defaults.
Credit VAR, Default VAR, or Credit at Risk
A variation of VAR that reflects credit risk.
Credit-linked notes
Fixed-income securities in which the holer of the security has the right to withhold payment of the full amount due at maturity if a credit event occurs.
Credit-worthiness
The perceived ability of the borrower to pay what is owed on the borrowing in a timely manner; it represents the ability of a company to withstand adverse impacts on its cash flows.
Cross elasticity of demand
The responsiveness of the demand for a good to change in the price of a substitute or complement, other things remaining the same. It is calculated as the percentage change in the quantity demanded of the good divided by the percentage change in the price of the substitute or complement.
Crossing networks
Trading systems that match buyers and sellers who are willing to trade at prices obtained from other markets.
Cross-product netting
Netting the market values of all contracts, not just derivatives, between parties.
Cross-sectional analysis
Analysis that involves comparisons across individuals in a group over a given time period or at a given point in time.
Cross-sectional data
Observations over individual units at a point in time; as opposed to time-series data.
Crowding-out effect
The tendency for a government budget deficit to decrease investment.
Cumulative distribution function
A function giving the probability that a random variable is less than or equal to a specified value.
Cumulative preference shares
Preference shares for which any dividends that are not paid accrue and must be paid in full before dividends on common shares can be paid.
Cumulative relative frequency
For data grouped into intervals, the fraction of total observations that are less than the value of the upper limit of a stated inverval.
Cumulative voting
Voting that allows shareholders to direct their total voting rights to specific candidates, as opposed to having to allocate their voting rights evenly among all candidates.
Currency
The notes and coins held by individuals and businesses.
Currency drain ratio
The ratio of currency to deposits.
Currency option
An option that allows the holder to buy (if a call) or sell (if a put) an underlying currency at a fixed exercise rate, expressed as an exchange rate.
Currency swap
A swap in which each party makes interest payments to the other in difference currencies.
Current assets, or liquid assets
Assets that are expected to be consumed or converted into cash in the near futures, tuypically one year or less.
Current costs
With reference to assets, the amount of cash or cash equivalents that would have to be paid to buy the same or an equivalent asset today; with reference to liablities, the undiscounted amount of cash or cash equivalents that would be required to settle the obligation today.
Current credit risk
The risk associated with the possibility that a payment currently due will not be made.
Current exchange rate
For accounting purposes, the spot exchange rate on the balance sheet date.
Current liabilities
Short-term obligations such as accounts payable, wages payable, or accrued liabilities, that are expected to be settled in the near future, typically one year or less.
Current rate method
Approach to translating foreign currently financial statements for consolidation in which all asset anad liabilitlies are translated at the current exchange rate. The current rate method is the prevalent method of translation.
Current ratio
A liquidity ratio calculated as current assets divided by current liablities.
Current taxes payable
Tax expenses that have been recognized and recorded on a company’s income statement but which have not yet been paid.
Cyclical company
A company whose profits are stongly correlated with the strength of the overall economy.
Cyclical stock
The shares (stock) of a company whose earnigns have above-average sensitivity to the business cycle.
Cyclical surplus or deficit
The actual surplus or deficit minus the structural surplus or deficit.
Cyclical unemployment
The fluctuating unemployment over the business cycle.
Daily settlement
See marking to market; A procedure used primarily in futures markets in which the parties to a contract settle the amount owed daily.
Dark pools
Alternative trading systems that do not display the orders that their clients send to them.
Data mining (or data snooping)
The practice of determining a model by extensive searching through a dataset for statistically significant patterns.
Day order
An order that is good for the day on which it is submitted. If it has not been filled by the close of business, the order expires unfilled.
Day trader
A trader holding a position open somewhat longer than scalper but closing all positions at the end of the day.
Days of inventory on hand (DOH)
An activity ratio equal to the number of days in the period divided by the inventory turnover over the period.
Days of sales outstanding (DSO)
An activity ratio equal to the number of days in the period divided by receivables turnover.
Dead cross
A technical analysis term that describes a situation where a short-term moving average crosses form above a longer-term moving average to below it; this movement is considered bearish.
Dead-hand provision
A poison pill provision that allows for the redemption or cancellation of a poison pill provision only by a vote of continuing directors (generally directors who were on the target company’s board prior to the takeover attempt).
Deadweight loss
A measure of inefficiency. It is equal to the decrease in total surplus that results from an inefficient level of production.
Dealers
A financial intermediary that acts as a principal in trades.
Dealing securities
Securities held by banks or other financial intermediaries for trading purposes.
Death with warrants
Debt issued with warrants that give the bondholder the right to purchase equity at prespecified terms.
Debit
With respect to double-entry accounting, a debit records increases of assets and expense accounts or decreases liability and owners’ equity accounts.
Debt coventants
Agreements between the company as borrower and its creditors.
Debt incurrence test
A financial covenant made in conjunction with existing debt that restricts a company’s ability to incur additional debt at the same seniority based on one or more financial tests or conditions.
Debt rating approach
A method for estimating a company’s before-tax cost of debt based upon the yield on comparably rated bonds for maturities that closely match that of the company’s existing debt.
Debt ratings
An objective measure of the quality and safety of a company’s debt based upon an analysis of a company’s ability to pay the promised cash flows, as well as an analysis of any indentures.
Debt-to-assets ratio
A solvency ratio calculated as total debt divided by total assets.
Debt-to-capital ratio
A solvency ratio calculated as total debt divided by total debt plus total shareholders’ equity.
Debt-to-equity ratio
A solvency ratio calculated as total debt dividied by total shareholders’ equity.
Decentralized risk management
A system that allows individual units within an organization to manage risk. Decentralization results in duplication of effort but has the advantage of having people closer to the risk be more directly involved in its management.
Deciles
Quantiles that divide a distribution into 10 equal parts.
Decision rules
With respect to hypothesis testing, the rule according to which the null hypothesis will be rejected or not rejected; involves a comparison of the test statistic to rejection point(s).
Declaration date
The day that the corporation issues a statement declaring a specific dividend.
Deductible temporary differences
Temporary differences that result in a reductino of or deduction from taxable income in a future period when the balance sheet item is recovered or settled.
Deep in the money
Options that are far in-the-money.
Deep out of the money
Options that are far out-of-the-money.
Default risk premium
An extra return that compensates investors for the possibility that the borrower will fail to make a promised payment at the contracted time and in the contracted amount.
Defensive company
A company whose revenues and profits are least affected by fluctutations in the overall economic activity.
Defensive interval ratio
A liquidity ratio that estimates the number of days that an entity could meet cash needs from liquid assets; calcuated as (cash + short-term marketable investments + receivables) divided by daily cash expenditures.
Defensive stock
The shares (stock) of a company whose earnings have below-average sensitivity to the business cycle.
Deferred tax assets
A balance sheet asset that arises when an excess amount is paid for income taxes relative to accounting profit. The taxable income is higher than accounting profit and income tax payable exceeds tax expense. The company expects to recover the difference during the course of future operations when tax expense exceeds income tax payalbe.
Deferred tax liabilities
A balance sheet liability that arises when a deficit amount is paid for income taxes relative to accounting profit. The taxable income is less than the accounting profit and income tax payable is less than tax expense. The company expects to eliminate the liablity over the course of future operations when income tax payable exceeds tax expense.
Defined-benefit pension plans
Plan in which the company promises to pay a certain annual amount (defined benefit) to the employee after retirement. The company bears the investment risk fo the plan assets.
Defined-contribution pension plans
Individual accounts to which an employee and typically the employer makes contributions, generally on a tax-advantaged vasis. The amounts of contributions are defined at the outset, but the future value fo the benefits is unknown. The employee bears the investment risk of the plan assets.
Definitive merger agreement
A contract signed by both parties to a merger that clarifies the details of the transaction, including the terms, warranties, conditions, termination details ,and the rights of all parties.
Degree of confidence
The probability that a confidence interval includes the unknown population parameter.
Degree of financial leverage (DFL)
The ratio of the percentage change in net income to the percentage change in operating income; the sensitivity of the cash flows available to owners when operating income changes.
Degree of operating leverage (DOL)
The ratio of the percentage change in operating income to the percentage change in units sold; the sensitivity of operating income to changes in units sold.
Degree of total leverage
The ratio of the percentage change in net income to the percentage change in units sold; the sensitivity of the cash flows to owners to changes in the number of units produced and sold.
Degrees of freedom (df)
The number of independent obervations used.
Delivery
A process used in a deliverable forward contract in which the long pays the agreed-upon price to the short, which in turn delivers the underlying asset to the long.
Delivery option
The feature of a futures contract giving the short the right to make decisison about what, when, and where to deliver.
Delta
The relationship between the option price and the underlying price, which reflects the sensitivity of the price of the optoin to changes in the price of the underlying.
Delta hedge
An option strategy in which a position in an asset is converted to a risk-free position with a position in a specific number fo options. The number of options per unit of underlying changes through time, and the posisition must be revised to maintain the hedge.
Delta-normal method
A measure of VAR equivalent to the analytical method but that refers to the use of delta to estimate the option’s price sensitivity.
Demand for money
The relationship between the quantity of money demanded and the interest rate when all other inflences on the amount of money that people wish to hold remain the same.
Demand-pull inflation
An inflation that results from an initial increase in aggregate demand.
Dependent variable
The variable whose variation about its mean is to be explained by the regression; the left-hand-side variable in a regression equation.
Depenedent
With reference to events, the property that the probability of one event occurring depends on (is related to) the occurrence of another event.
Depository institution
A firm that takes deposits from households and firms and makes loans to other households and firms.
Depository institutions
Commerical banks, savings and loan banks, credit unions, and similar institutions that raise funds from depositors and other investors and lend it to borrowers.
Depository receipt
A security that trades like an ordinary share on a local exchange and represents an economic interest in a foreign company.
Depreciation
The process of systematically allocating the cost of long-lived (tangible) assets to the periods during which the assets are expected to provide economic benefits.
Derivative
A financial instrument whose value depends on the value of some underlying asset or factor (e.g., a stock price, an interest rate, or exchange rate).
Derivative pricing rule
A pricing rule used by crossing networks in which a price is taken (derived) from the price that is current in the asset’s primary market.
Derivatives dealers
Commercial and investment banks that make markets in derivatives.
Derived demand
Demand for a factor of production, which is derived from the demand for the goods and services producted by that factor.
Descriptive statistics
The study of how data can be summarized effectively.
Designated fair value instruments
Financial instruments that an entity chooses to measure at fair value per IAS 39 or SFAS 159. Generally, the election to use the fair value option is irrevocable.
Desired reserve ratio
The ratio of reserves to deposits that banks want to hold.
Diff swaps
A swap in which the payments are based on the difference beween interest rates in two countries but payments are made in only a single currency.
Diffuse prior
The assumption of equal prior probabilities.
Diluted EPS
The EPS that would result if all dilutive securities were converted into common shares.
Diluted shares
The number of shares that would be outstanding if all potentially dilutive claims on common shares (e.g., convertible debt, convertible preferred stock, and employee stock options) were exercised.
Diminishing balance method
An accelerated depreciation method, i.e., one that allocates a relatively large proportion of the cost of an asset to the early years of the asset’s useful life.
Diminishing marginal returns
The tendency for the marginal product of an additional unit of a factor of production to be less than the marginal product of the previous unit of the factor.
Direct debit program
An arrangement whereby a customer authorizes a debit to a demand account; typically used by companies to collect routine payments for services.
Direct financing lease
A type of finance lease, from a lessor perspective, where the present value of the lease payments (lease receivable) equals the carrying value of the leased asset. The revenues earned by the lessor are financing in nature.
Direct format (direct method)
With reference to the cash flow statement, a format for the presentation of the sttatement in which cash flow from operating activities is shown as operating cash receipts less operating cash disbursements.
Direct write-off method
An approach to recognizing credit losses on customer receivables in which the company waits until such time as a customer has defaulted and only then recognizes the loss.
Dirty-surplus accounting
Accounting in which some income items are reported as part of stockholders’ equtiy rather than as gains and lossse on the income statement; certain items of comprehensive income bypass the income statement and appear as direct adjustments to shareholders’ equity.
Dirty-surplus items
Direct adjustments to shareholders’ equity that bypass the income statement.
Disbursement float
The amount of time between check issuance and a check’s clearing back against the company’s account.
Discount
To reduce the value of a future payment in allowance for how far away it is in time; to calculate the present value of some future amount. Also, the amount by which an instrument is priced below its face value.
Discount interest
A procedure for determining the interest on a loan or bond in which the interest is deducted form the face value in advance.
Discount rate
The interest rate at which the Fed stands ready to lend reserves to depository institutions.
Discounted cash flow analysis
In the context of merger analysis, it is an estimate of a target company’s value found by discounting the company’s expected future free cash flows to the present.
Discouraged workers
People who are available and willing to work but have not made specific effort to find a job in the previous four weeks.
Discrete random variable
A random variable that can take on at most a countable number of possible values.
Discrete time
Time thought of as advancing in distinct finite increments.
Discretionary fiscal policy
A fiscal action that is intitiated by an act of Congress.
Discriminant analysis
A multivariate classificiation technique used to discriminate between groups, such as companies that either will or will not become bankrupt during some time frame.
Discriminatory pricing rule
A pricing rule used in continuous markets in which the limit price of the order or quote that first arrived determines the trade prices.
Diseconomies of scale
Features of a firm’s technology that lead to rising long-run average cost as output increases.
Dispersion
The variability around the central tendency.
Display size
The size of an order displayed to public view.
Disposable income
Aggregate income minus taxes plus transfer payments.
Divergence
In technical analysis, a term that describes the case when an indicator moves differently from the security being analyzed.
Diversifiacation ratio
The ratio of the standard deviation of an equally weighted portfolio to the standard deviation of a randomly selected security.
Divestiture
The sale, liquidation, or spin-off of a dvision or subsidiary.
Dividend
A distribution paid to shareholders based on the number of shares owned.
Dividend discount model (DDM)
A present value model that estimates the intrinsic value of an equity share based on the present value of its expected future dividends.
Dividend discount model based approach
An approach for estimating a country’s equity risk premium. The market rate of return is estimated as the sum fo the dividend yield and the growth rate in dividends for a market index. Subtracting the risk-free rate of return from the estimated market return produces an estimate for the equity risk premium.
Dividend payout policy
The strategy a company follows with regard to the amount and timing of dividend payments.
Dividend payout ratio
The ratio of cash dividends paid to earnings for a period.
Dividend yield
Annual dividends per share divided by share price.
Dividends per share
The dollar amount of cash dividends paid during a period per share of common stock.
Divisor
A number (denominator) used to determine the value of a price return index. It is intiailly chosen at the inception of an index and subsequently adjusted by the index provder, as necessary, to avoid changes in the index value that are unrelated to changes in the prices of its contintuent securities.
Dominant strategy equilibrium
A Nash equilibrium in which the best strategy for each player is to cheat (deny) regardless of the strategy of the other player.
Double bottoms
In technical analysis, a reversal pattern that is formed when the price reaches a low, rebounds, and then sells off back to the first low level; used to predict a change from a downtrend to an uptrend.
Double declining balance depreciation
An accelerated deprecation method that involves depreciating the asset at double the straight-line rate. This rate is multipled by the book value of the asset at the beginning of the period (a declining balance) to calcuate deprecation expense.
Double taxation
Corporate earnings are taxed twice when paid out as dividends. First, corporate earnings are taxed regardless of whether they will be distributed as dividends or retained at the corporate level, and second, dividends are taxed again at the individual shareholder level.
Double top
In technical analysis, a reversal pattern that is formed when an uptrend reverses twice at roughly the same high price level; used to predict a change from an uptrend to a downtrend.
Double-entry accounting
The accounting system of recording transactions in which every recorded transaction affects at least two accounts so as to keep the basic accounting equation (assets = liabilities + owners’ equity) in balance.
Down transition probability
The probability that an asset’s value moves down in a model of asset price dynamics.
Downstream
A transaction between two affiliates, an investor company and an associate company such that the investor company records a profit on its income statement. An example is a sale of inventory by the investor company to the associate.
Drag on liquidity
When receipts lag, creating pressure from the decreased available funds.
Dummy variable
A type of qualitative variable that takes on a value of 1 if a particular condition is true and 0 if that condition is false.
Duopoly
A market structure in which two producers of a good or service compete.
DuPont analysis
An approach to decomposing return on investment, e.g., return on equity, as the product of other financial ratios.
Duration
A measure of an option-free bond’s average maturity. Specifically, the weighted average maturity of all future cash flows paid by a security, in which the weights are the present measure of a bond’s price sensitivity to interest rate movements.
Dutch Book theorem
A result in probability theory stating that inconsistent probabilities create profit opportuntiies.
Dynamic hedging
A strategy in which a position is hedged by making frequent adjustments to the quantity of the instrument used for hedging in relation the instrument being hedged.
Earnings at risk (EAR)
A variation if VAR that reflects the risk of a company’s earnings instead of its market value.
Earnings expectation management
Attempts by management to influence analysts’ earnings forecasts.
Earnings game
Management’s focus on reporting earnings that meet consensus estimates.
Earnings mangement activity
Deliverate activity aimed at influencing reporting earnings numbers, often with the goal of placing mangement in a favorable light; the opportunistic use of accruals to manage earnings.
Earnings per share
The amount of income earned during a period per share of common stock.
Earnings surprise
The portion of a company’s earnings that is unanticipated by investors and, according to the efficient market hypothesis, merits a price adjustment.
Economic depreciation
The change in the market value of capital over a given period.
Economic efficiency
A situation that occurs when the firm produces a given output at the least cost.
Economic exposure
The risk associated with changes in the relative attractiveness of products and services offered for sale, arising out of the competitive effects of changes in exchange rates.
Economic order quantity–reorder point
An approach to managing inventory based on expected demand and the predictability of demand; the ordering point for new inventory is determined based on the costs of ordering and carrying inventory, such that the total cost associated with inventory is minimized.
Economic profit
A firm’s total revenue minus its total cost.
Economic rent
Any surplus–consumer surplus, producer suplus or economic profit. The income received by the owner of a factor of production over and above the amount required to induce that owner to offer the factor for use.
Economies of scale
Features of a firm’s technology that lead to a falling long-run average cost as output increases. In reference to mergers, it is the savings achieved through the consolidation of operations and eliminations of duplicate resources.
Economies of scope
Decreases in average total cost that occur when a firm uses specialized resources to produce a range of goods and services.
Effective annual rate
The amount by which a unit of currency will grow in a year with interest on interest included.
Effective annual yield (EAY)
An annualized return that accounts for the effect of interest on interest; EAY is computed by compounding 1 plus the holding period yield forward to one year, then subtracting 1.
Effective interest rate
The borrowing rate or market rate that a company incurs at the time of issuance of a bond.
Efficiency
In statistics, a desirable property of estimators; an efficient estomator is the unbiased estimator with the smallest variance among unbiased estimators of the same parameter.
Efficiency wage
A real wage rate that is set above the equilibrium wage rate and that balances the costs and benefits of this higher wage rate to maximize the firm’s profit.
Efficient frontier
The portion of the minimum-variance frontier beginning with the global minimum-variance portfolio and continuing above it; the graph of the set of portfolios offering the maximum expected return for their level of variance of return.
Efficient portfolio
A portfolio offering the highest expected return for a given level of risk as measured by variance or standard deviation of return.
Elastic demand
Demand with the price elasticity greater than 1; other things remaining the same, the percentage change in the quantity demanded exceeds the percentage change in price.
Elasticity
A measure of sensitivity; the incremental change in one variable with respect to an incremental change in another variable.
Elasticity of supply
The responsiveness of the quantity supplied of a good to a change in its price, other things remaining the same.
Electronic funds transfer
The use of computer networks to conduct financial transactions electronically.
Elliott wave theory
A technical analysis theory that claims that the market follows regular, repeated waves or cycles.
Empirical probability
The probability of an event estimated as a relative frequency of occurrence.
Employment Act of 1946
A landmark Congressional act that recognizes a role for government actions to keep unemployment low, the economy expanding, and inflation in check.
Employment-to-population ratio
The percentage of people of working age who have jobs.
Enhanced derivatives products companies (EDPC)
A type of subsidiary engaged in derivatives transactions that is separated from the parent company in order to have a higher credit rating that the parent company.
Enterprise risk management
A form of centralized risk management that typically encompasses the management of a broad variety of risks, including insurance risk.
Enterprise value
A measure of a company’s total market value from which the value of cash and short-term investments have been subtracted.
Equal weighting
An index weighting method in which an equal weight is assigned to each constituent security at inception.
Equitizing cash
A strategy used to replicate an index. It is also used to take a given amount of cash and turn it into an equity position while maintaing the liquidity provided by the cash.
Equity
Assets less liabilities; the residual interest in the asset after subtacting the liabilities.
Equity carve-out
A form of restructuring that involves the creation of a new legal entity and the sale of equity in it to outsiders.
Equity forward
A contract calling for the purchase of an individual stock, a stock portfolio, or a stock index at a later date at an agreed-upon price.
Equity method
A basis for reporting investment income in which the investing entity recognizes a share of income as earned rather than as dividends when received. These transactions are typically reflected in Investments in Associations or Equity Method Investments.
Equity options
Options on individual stocks; also known as stock options.
Equity risk premiums
The expected return on equities minus the risk-free rate; the premium that investors demand for investing in equities.
Equity swap
A swap transaction in which at least one cash flow is tied to the return to an equity portfolio position, often an equity index.
Error autocorrelation
The autocorrelation of the error term.
Error term
The portion of the depedent variable that is not explained by the independent variable(s) in the regression.
Estimate
The particular value calculated from sample observations using an estimator.
Estimated (or fitted) parameters
With reference to regression analysis, the estimated values of the population intercept and pupulation slope coefficient(s) in a regression.
Estimation
With reference to statistical inference, the subdivision dealing with estimating the value of a population parameter.
Estimator
An estimation formula; the formula used to compute the sample mean and other sample statistics are examples of estimators.
Eurodollar
A dollar deposited outside the United States.
European-style option (or European option)
An option that can only be exercised on its expiration date.
Event
Any outcome or specified set of outcomes of a random variable.
Excess kurtosis
Degreee of peakedness (fatness of tails) in excess of the peakedness of the normal distribution.
