GLOSSARY

Question 1

A priori probability

Answer 1

A probability based on logical analysis

rather than on observation or personal judgment.

Question 2

Abandonment option

Answer 2

The ability to terminate an investment

at some future time if the financial results are disappointing.

Question 3

Abnormal return

Answer 3

The amount by which a security’s actual
return differs from its expected return, given the security’s
risk and the market’s return

Question 4

Absolute dispersion

Answer 4

The amount of variability present

without comparison to any reference point or benchmark.

Question 5

Absolute frequency

Answer 5

The actual number of observations
counted for each unique value of the variable (also called
raw frequency)

Question 6

Accelerated book build

Answer 6

An offering of securities by an investment bank acting as principal that is accomplished in only
one or two days.

Question 7

Accelerated methods

Answer 7

Depreciation methods that allocate
a relatively large proportion of the cost of an asset to the
early years of the asset’s useful life.

Question 8

Accounting costs

Answer 8

Monetary value of economic resources
used in performing an activity. These can be explicit, outof-pocket, current payments, or an allocation of historical
payments (depreciation) for resources. They do not include
implicit opportunity costs.

Question 9

Accounting profit

Answer 9

Income as reported on the income statement, in accordance with prevailing accounting standards,
before the provisions for income tax expense. Also called
income before taxes or pretax income.

Question 10

Accounts payable

Answer 10

Amounts that a business owes to its vendors
for goods and services that were purchased from them but
which have not yet been paid.

Question 11

Accrued expenses

Answer 11

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.” Also called accrued liabilities

Question 12

Accrued interest

Answer 12

Interest earned but not yet paid.

Question 13

Acquisition method

Answer 13

A method of accounting 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.

Question 14

Action lag

Answer 14

Delay from policy decisions to implementation.

Question 15

Active investment

Answer 15

An approach to investing in which the

investor seeks to outperform a given benchmark.

Question 16

Active return

Answer 16

The return on a portfolio minus the return on

the portfolio’s benchmark.

Question 17

Activity ratios

Answer 17

Ratios that measure how efficiently a company performs day-to-day tasks, such as the collection of
receivables and management of inventory. Also called asset
utilization ratios or operating efficiency ratios.

Question 18

Add-on rates

Answer 18

Bank certificates of deposit, repos, and indexes
such as Libor and Euribor are quoted on an add-on rate
basis (bond equivalent yield basis)

Question 19

Addition rule for probabilities

Answer 19

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 probability that both A and B occur.

Question 20

Agency bond

Answer 20

a security issued by a government-sponsored enterprise or by a federal government department other than the U.S. Treasury. Some are not fully guaranteed in the same way that U.S. Treasury and municipal bonds are. An agency bond is also known as agency debt.

Question 21

Agency costs

Answer 21

Costs associated with the conflict of interest
present between principals and agents when a company
is managed by non-owners. Agency costs result from the
inherent conflicts of interest between managers, bondholders, and equity owners.

Question 22

Agency costs of debt

Answer 22

Costs arising from conflicts of interest

between managers and debtholders.

Question 23

Agency costs of equity

Answer 23

The smaller the stake managers have
in the company, the less their share in bearing the cost
of excessive perquisite consumption—consequently, the
less their desire to give their best efforts in running the
company

Question 24

Agency RMBS

Answer 24

In the United States, securities backed by
residential mortgage loans and guaranteed by a federal
agency or guaranteed by either of the two GSEs (Fannie
Mae and Freddie Mac).

Question 25

All-or-nothing (AON) orders

Answer 25

An order that includes the
instruction to trade only if the trade fills the entire quantity
(size) specified.

Question 26

Allocationally efficient

Answer 26

A characteristic of a market, a financial system, or an economy that promotes the allocation
of resources to their highest value uses.

Question 27

Alternative data

Answer 27

Non-traditional data types generated by the
use of electronic devices, social media, satellite and sensor
networks, and company exhaust.

Question 28

Alternative investment markets

Answer 28

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, private equity, and other investments
requiring specialized due diligence.

Question 29

Alternative trading systems

Answer 29

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. Also
called electronic communications networks or multilateral
trading facilities.