Investments Flashcards
1
Q
abnormal return
A
Return on a stock beyond what would be predicted by market movements alone. Cumulative abnormal return (CAR) is the total abnormal return for the period surrounding an announcement or the release of information.
2
Q
accounting earnings
A
Earnings of a firm as reported on its income statement
3
Q
active management
A
Attempts to achieve portfolio returns more than commensurate with risk, either by forecasting broad market trends or by identifying particular mispriced broad market trends or by identifying particular mispriced sectors of a market or securities in a market.
4
Q
active portfolio
A
In the context of the Treynor-Black model, the portfolio formed by mixing analyzed stocks of perceived nonzero alpha values. This portfolio is ultimately mixed with the passive market-index portfolio.
5
Q
adjusted alphas
A
Forecasts for alpha that are modulated to account for statistical imprecision in the analyst’s estimate
6
Q
agency problem
A
Conflicts of interest among stockholders, bondholders, and managers.
7
Q
algorithmic trading
A
The use of computer programs to make trading decisions.
8
Q
alpha
A
The abnormal rate of return on a security in excess of what would be predicted by an equilibrium model like CAPM or APT.
9
Q
alpha transfer
A
A strategy in which you invest in positive alpha positions, hedge the systematic risk of the investment, and finally establish market exposure where you want it using passive indexes.
10
Q
American depository receipts (ADRs)
A
Domestically traded securities representing claims to shares of foreign stocks.
11
Q
American option
A
An American option can be exercised before and up to its expiration date. Compare with a European option, which can be exercised only on the expiration date.
12
Q
announcement date
A
Date on which particular news concerning a given company is announced to the public. Used in event studies, which researchers use to evaluate the economic impact of events of interest.
13
Q
annual percentage rate (APR)
A
Interest rate is annualized using simple rather than compound interest.
14
Q
anomalies
A
Patterns of returns that seem to contradict the efficient market hypothesis.
15
Q
appraisal ratio
A
The signal-to-noise ratio of an analyst’s forecasts. The ratio of alpha to residual standard deviation
16
Q
arbitrage
A
A zero-risk, zero-net investment strategy that still generates profits.
17
Q
arbitrage pricing theory
A
An asset pricing theory that
is derived from a factor model, using diversification and arbitrage arguments. The theory describes the relationship between expected returns on securities, given that there are no opportunities to create wealth through risk-free arbitrage investments.
18
Q
ask price
A
The price at which a dealer will sell a security.
19
Q
asset allocation
A
Choosing among broad asset classes such
as stocks versus bonds.
20
Q
at the money
A
When the exercise price and asset price of an option are equal.
21
Q
auction market
A
A market where all traders in a good meet at one place to buy or sell an asset. The NYSE is an example.
22
Q
average collection period, or days’ receivables
A
The ratio of accounts receivable to sales, or the total amount of credit extended per dollar of daily sales (average AR/sales x 365).
23
Q
backfill bias
A
Bias in the average returns of a sample of funds induced by including past returns on funds that entered the sample only if they happened to be successful.
24
Q
balance sheet
A
An accounting statement of a firm’s financial position at a specified time.
25
bank discount yield
An annualized interest rate assuming simple interest, a 360-day year, and using the face value of the security rather than purchase price to compute return per dollar invested.
26
banker's acceptance
A money market asset consisting of an order to a bank by a customer to pay a sum of money at a future date.
27
baseline forecasts
Forecast of security returns derived from the assumption that the market is in equilibrium where current prices reflect all available information.
28
basis
The difference between the futures price and the spot price.
29
basis risk
Risk attributable to uncertain movements in the spread between a futures price and a spot price.
30
behavioral finance
Models of financial markets that emphasize implications of psychological factors affecting investor behavior.
31
benchmark error
Use of an inappropriate proxy for the true market portfolio.
32
benchmark portfolio
Portfolio against which a manager is to be evaluated.
33
beta
The measure of the systematic risk of a security. The tendency of a security’s returns to respond to swings in the broad market.
34
bid-ask spread
The difference between a dealer’s bid and ask price.
35
bid price
The price at which a dealer is willing to purchase a security
36
binomial model
An option-valuation model predicated on the assumption that stock prices can move to only two values over any short time period.
37
Black-Scholes formula
An equation to value a call option that uses the stock price, the exercise price, the risk-free interest rate, the time to maturity, and the standard deviation of the stock return.
38
blocks, block sale
A transaction of more than 10,000 shares of stock.
39
bogey
The return an investment manager is compared to for performance evaluation.
40
bond
A security issued by a borrower that obligates the issuer to make specified payments to the holder over a specific period. A coupon bond obligates the issuer to make interest payments called coupon payments over the life of the bond, then to repay the face value at maturity.
41
bond equivalent yield
Bond yield calculated on an annual percentage rate method. Differs from effective annual yield.
42
bond indenture
The contract between the issuer and the bondholder.
43
bond reconstruction
Combining stripped Treasury securities to re-create the original cash flows of a Treasury bond.
44
bond stripping
Selling bond cash flows (either coupon or principal payments) as stand-alone zero-coupon securities.
45
book-to-market effect
The tendency for stocks of firms with high ratios of book-to-market value to generate abnor- mal returns.
46
book value
An accounting measure describing the net worth of common equity according to a firm’s balance sheet.
47
breadth
The extent to which movements in the broad market index are reflected widely in movements of individual stock prices.
48
brokered market
A market where an intermediary (a broker) offers search services to buyers and sellers.
49
budget deficit
The amount by which government spending exceeds government revenues.
50
bull CD, bear CD
A bull CD pays its holder a specified percentage of the increase in return on a specified market index while guaranteeing a minimum rate of return. A bear CD pays the holder a fraction of any fall in a given market index.
51
bullish, bearish
Words used to describe investor attitudes. Bullish means optimistic; bearish means pessimistic. Also used in bull market and bear market.
52
bundling, unbundling
A trend allowing creation of secu- rities either by combining primitive and derivative securities into one composite hybrid or by separating returns on an asset into classes.
53
business cycle
Repetitive cycles of recession and recovery
54
calendar spread
Buy one option and write another with a different expiration date.
55
callable bond
A bond that the issuer may repurchase at a given price in some specified period.
56
call option
The right to buy an asset at a specified exercise price on or before a specified expiration date.
57
call protection
An initial period during which a callable bond may not be called.
58
capital allocation decision
Allocation of invested funds between risk-free assets versus the risky portfolio.
59
capital allocation line (CAL)
A graph showing all feasible risk–return combinations of a risky and risk-free asset.
60
capital gains
The amount by which the sale price of a security exceeds the purchase price.
61
capital market line (CML)
A capital allocation line provided by the market-index portfolio.
62
capital markets
Includes longer-term, relatively riskier securities.
63
cash/bond selection
Asset allocation in which the choice is between short-term cash equivalents and longer-term bonds.
64
cash equivalents
Short-term money-market securities
65
cash flow matching
form of immunization, matching
cash flows from a bond portfolio with an obligation.
66
cash ratio
Measure of liquidity of a firm. Ratio of cash and marketable securities to current liabilities.
67
cash settlement
The provision of some futures contracts that requires not delivery of the underlying assets (as in agricultural futures) but settlement according to the cash value of the asset.
68
certainty equivalent rate
The certain return providing the same utility as a risky portfolio.
69
certificate of deposit
A bank time deposit
70
clearinghouse
Established by exchanges to facilitate transfer of securities resulting from trades. For options and futures contracts, the clearinghouse may interpose itself as a middleman between two traders.
71
closed-end (mutual) fund
A fund whose shares are traded through brokers at market prices; the fund will not redeem shares at their net asset value. The market price of the fund can differ from the net asset value.
72
collar
An options strategy that brackets the value of a portfolio between two bounds.
73
collateral
A specific asset pledged against possible default on a bond. Mortgage bonds are backed by claims on property. Collateral trust bonds are backed by claims on other securities. Equipment obligation bonds are backed by claims on equipment.
74
collateralized debt obligation (CDO)
A pool of loans sliced into several tranches with different levels of risk.
75
collateralized mortgage obligation (CMO)
A mortgage pass-through security that partitions cash flows from underlying mortgages into classes called tranches that receive principal payments according to stipulated rules.
76
commercial paper
Short-term unsecured debt issued by large corporations.
77
common stock
Equities, or equity securities, issued
as ownership shares in a publicly held corporation. Shareholders have voting rights and may receive dividends based on their proportionate ownership.
78
comparison universe
The collection of money managers of similar investment style used for assessing relative performance of a portfolio manager.
79
complete portfolio
The entire portfolio, including risky and risk-free assets.
80
conditional tail expectation
Expectation of a random variable conditional on its falling below some threshold value. Often used as a measure of down side risk.
81
confidence index
Ratio of the yield of top-rated corporate bonds to the yield on intermediate-grade bonds.
82
conservativism
Notion that investors are too slow to update their beliefs in response to new evidence.
83
constant-growth DDM
A form of the dividend discount model that assumes dividends will grow at a constant rate.
84
contango theory
Holds that the futures price must exceed the expected future spot price.
85
contingent claim
Claim whose value is directly dependent on or is contingent on the value of some underlying assets.
86
contingent immunization
A mixed passive-active strategy that immunizes a portfolio if necessary to guarantee a minimum acceptable return but otherwise allows active management.
87
convergence arbitrage
A bet that two or more prices are out of alignment and that profits can be made when the prices converge back to proper relationship.
88
convergence arbitrage
The convergence of futures prices and spot prices at the maturity of the futures contract.
89
convertible bond
A bond with an option allowing the bondholder to exchange the bond for a specified number of shares of common stock in the firm. A conversion ratio specifies the number of shares. The market conversion price is the current value of the shares for which the bond may be exchanged. The conversion premium is the excess of the bond’s value over the conversion price.
90
convexity
The curvature of the price-yield relationship of a bond.
91
corporate bonds
Long-term debt issued by private corporations typically paying semiannual coupons and returning the face value of the bond at maturity.
92
correlation coefficient
A statistic in which the covariance is scaled to a value between -1 (perfect negative correlation) and +1 (perfect positive correlation).
93
country selection
A type of active international management that measures the contribution to performance attributable to investing in the better-performing stock markets of the world.
94
coupon rate
A bond’s interest payments per dollar of par value.
95
covariance
A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns move together. A negative covariance means they vary inversely.
96
covered call
A combination of selling a call on a stock together with buying the stock.
97
credit default swap (CDS)
A derivative contract in which one party sells insurance concerning the credit risk of another firm.
98
credit enhancement
Purchase of the financial guarantee of a large insurance company to raise funds.
99
credit risk
Default risk
100
cross-hedge
Hedging a position in one asset using futures
on another commodity.
101
currency selection
Asset allocation in which the investor chooses among investments denominated in different currencies.
102
current ratio
A ratio representing the ability of the firm to pay off its current liabilities by liquidating current assets (current assets/current liabilities).
103
current yield
A bond’s annual coupon payment divided by its price. Differs from yield to maturity.
104
cyclical industries
Industries with above-average sensitivity to the state of the economy.
105
dark pools
Electronic trading networks where participants can anonymously buy or sell large blocks of securities.
106
data mining
Sorting through large amounts of historical data to uncover systematic patterns that can be exploited.
107
day order
A buy order or a sell order expiring at the close of the trading day.
108
dealer market
A market where traders specializing in particular commodities buy and sell assets for their own accounts. The OTC market is an example.
109
debenture or unsecured bond
A bond not backed by specific collateral.
110
debt securities
Bonds; also called fixed-income securities.
111
dedication strategy
Refers to multiperiod cash flow matching.
112
default premium
A differential in promised yield that compensates the investor for the risk inherent in purchasing a corporate bond that entails some risk of default.
113
defensive industries
Industries with little sensitivity to the state of the economy
114
deferred annuities
Tax-advantaged life insurance product. Deferred annuities offer deferral of taxes with the option of
withdrawing one’s funds in the form of a life annuity.
115
defined benefit plans
Pension plans in which retirement benefits are set according to a fixed formula.
116
defined contribution plans
Pension plans in which the employer is committed to making contributions according to a fixed formula.
117
degree of operating leverage
Percentage change in profits for a 1% change in sales.
118
delta neutral
The value of the portfolio is not affected by changes in the value of the asset on which the options are written.
119
demand shock
An event that affects the demand for goods and services in the economy.
120
derivative asset/contingent claim
Securities providing payoffs that depend on or are contingent on the values of other assets such as commodity prices, bond and stock prices, or market-index values. Examples are futures and options.
121
derivative security
A security whose payoff depends on the value of other financial variables such as stock prices, interest rates, or exchange rates.
122
direct search market
Buyers and sellers seek each other directly and transact directly.
123
directional strategy
Speculation that one sector or another will outperform other sectors of the market.
124
discount bonds
Bonds selling below par value.
125
discretionary account
An account of a customer who gives a broker the authority to make buy and sell decisions on the customer’s behalf.
126
disposition effect
The tendency of investors to hold on to losing investments.
127
diversifiable risk
Risk attributable to firm-specific risk, or nonmarket risk. Nondiversifiable risk refers to systematic or
market risk.
128
diversification
Spreading a portfolio over many investments to avoid excessive exposure to any one source of risk.
129
dividend discount model (DDM)
A formula stating that the intrinsic value of a firm is the present value of all expected future dividends.
130
dividend payout ratio
Percentage of earnings paid out as dividends.
131
dividend yield
The percent rate of return provided by a stock’s dividend payments.
132
dollar-weighted rate of return
The internal rate of return on an investment.
133
doubling option
A sinking fund provision that may allow repurchase of twice the required number of bonds at the sinking fund call price.
134
DuPont system
Decomposition of a firm’s profitability measures into the underlying factors that determine such profitability.
135
duration
A measure of the average life of a bond, defined as the weighted average of the times until each payment is made, with weights proportional to the present value of the payment.
136
dynamic hedging
Constant updating of hedge positions as market conditions change.
137
EAFE index
The Europe, Australasia, Far East index, computed by Morgan Stanley, is a widely used index of
non-U.S. stocks.
138
earnings management
The practice of using flexibility in accounting rules to improve the apparent profitability of the firm.
139
earnings retention ratio
Plowback ratio
140
earnings yield
The ratio of earnings to price, E/P.
141
economic earnings
The real flow of cash that a firm could pay out forever in the absence of any change in the firm’s productive capacity.
142
economic value added (EVA)
The spread between ROA and cost of capital multiplied by the capital invested in the firm. It measures the dollar value of the firm’s return in excess of its opportunity cost.
143
effective annual rate (EAR)
Interest rate annualized using compound rather than simple interest.
144
effective annual yield
Annualized interest rate on a security computed using compound interest techniques.
145
effective duration
Percentage change in bond price per change in the level of market interest rates.
146
efficient diversification
The organizing principle of mod- ern portfolio theory, which maintains that any risk-averse investor will search for the highest expected return for any level of portfolio risk.
147
efficient frontier
Graph representing a set of portfolios that maximize expected return at each level of portfolio risk.
148
efficient frontier of risky assets
The portion of the minimum-variance frontier that lies above the global minimum-variance portfolio.
149
efficient market hypothesis
The prices of securities fully reflect available information. Investors buying securities in an efficient market should expect to obtain an equilibrium rate of return. Weak-form EMH asserts that stock prices already reflect all information contained in the history of past prices. The semistrong-form hypothesis asserts that stock prices already reflect all publicly available information. The strong-form hypothesis asserts that stock prices reflect all relevant information including insider information.
150
elasticity (of an option)
Percentage change in the value of an option accompanying a 1% change in the value of a stock.
151
electronic communication network (ECN)
A computer-operated trading network offering an alternative to formal stock exchanges or dealer markets for trading securities.
152
endowment funds
Organizations chartered to invest money for specific purposes.
153
equities
Ownership shares in a firm.
154
equity
Ownership in a firm. Also, the net worth of a
margin account.
155
equivalent taxable yield
The pretax yield on a taxable bond providing an after-tax yield equal to the rate on a tax-exempt municipal bond.
156
Eurodollars
Dollar-denominated deposits at foreign banks or foreign branches of American banks.
157
Europe, Australasia, Far East (EAFE) index
A widely used index of non-U.S. stocks computed by Morgan Stanley
158
European option
A European option can be exercised only on the expiration date. Compare with an American option, which can be exercised before, up to, and on its expiration date.
159
event study
Research methodology designed to measure the impact of an event of interest on stock returns.
160
event tree
Depicts all possible sequences of events.
161
excess return
Rate of return in excess of the risk-free rate.
162
exchange rate
Price of a unit of one country’s currency in terms of another country’s currency.
163
exchange rate risk
The uncertainty in asset returns due to movements in the exchange rates between the dollar and foreign currencies.
164
exchange-traded funds (ETFs)
Offshoots of mutual funds that allow investors to trade portfolios of securities just as they do shares of stock.
165
exchanges
National or regional auction markets providing a facility for members to trade securities. A seat is a membership on an exchange.
166
exercise or strike price
Price set for calling (buying) an asset or putting (selling) an asset.
167
expectations hypothesis (of interest rates)
Theory that forward interest rates are unbiased estimates of expected future interest rates.
168
expected return
The probability-weighted average of the possible outcomes.
169
expected return-beta (or mean-beta) relationship
Implication of the CAPM that security risk premiums (expected excess returns) will be proportional to beta.
170
expected shortfall
The expected loss on a security conditional on returns being in the left tail of the probability distribution.
171
face value
The maturity value of a bond.
172
factor beta
Sensitivity of security returns to changes in a systematic factor. Alternatively, factor loading; factor sensitivity.
173
factor model
A way of decomposing the factors that influence a security’s rate of return into common and firm-specific influences.
174
factor portfolio
A well-diversified portfolio constructed to have a beta of 1.0 on one factor and a beta of 0 on any other factor.
175
fair game
An investment prospect that has a zero risk
premium.
176
fair value accounting
Use of current values rather than historic cost in the firm’s financial statements.
177
federal funds
Funds in a bank’s reserve account.
178
FIFO
The first-in first-out accounting method of inventory
valuation.
179
financial assets
Financial assets such as stocks and bonds are claims to the income generated by real assets or claims on income from the government.
180
financial engineering
Creating and designing securities with custom-tailored characteristics.
181
financial intermediary
An institution such as a bank, mutual fund, investment company, or insurance company that serves to connect the household and business sectors so households can invest and businesses can finance production.
182
first-pass regression
A time series regression to estimate the betas of securities or portfolios.
183
fiscal policy
The use of government spending and taxing for the specific purpose of stabilizing the economy.
184
fixed annuities
Annuity contracts in which the insurance company pays a fixed dollar amount of money per period.
185
fixed-charge coverage ratio
Ratio of earnings to all fixed cash obligations, including lease payments and sinking fund payments.
186
fixed-income security
A security such as a bond that pays a specified cash flow over a specific period.
187
flight to quality
Describes the tendency of investors to require larger default premiums on investments under uncertain economic conditions.
188
floating-rate bond
A bond whose interest rate is reset periodically according to a specified market rate.
189
forced conversion
Use of a firm’s call option on a callable convertible bond when the firm knows that bondholders will exercise their option to convert.
190
forecasting record
The historical record of the forecasting errors of a security analyst.
191
foreign exchange market
An informal network of banks and brokers that allows customers to enter forward contracts to purchase or sell currencies in the future at a rate of exchange agreed upon now.
192
foreign exchange swap
An agreement to exchange stipulated amounts of one currency for another at one or more future dates.
193
forward contract
An agreement calling for future delivery of an asset at an agreed-upon price. Also see futures contract.
194
forward interest rate
Rate of interest for a future period that would equate the total return of a long-term bond with that of a strategy of rolling over shorter-term bonds. The forward rate is inferred from the term structure.
195
framing
Decisions are affected by how choices are described, for example, whether uncertainty is posed as potential gains from a low baseline level, or as losses from a higher baseline value.
196
fully diluted earnings per share
Earnings per share expressed as if all outstanding convertible securities and warrants have been exercised.
197
fundamental analysis
Research to predict stock value that focuses on such determinants as earnings and dividends prospects, expectations for future interest rates, and risk evaluation of the firm.
198
fundamental risk
Risk that even if an asset is mispriced, there is still no arbitrage opportunity, because the mispricing can widen before price eventually converges to intrinsic value.
199
funds of funds
Hedge funds that invest in several other hedge funds.
200
futures contract
Obliges traders to purchase or sell an asset at an agreed-upon price on a specified future date. The long position is held by the trader who commits to purchase. The short position is held by the trader who commits to sell. Futures differ from forward contracts in their standardization, exchange trading, margin requirements, and daily settling (marking to market).
201
futures option
The right to enter a specified futures contract at a futures price equal to the stipulated exercise price.
202
futures price
The price at which a futures trader commits to make or take delivery of the underlying asset.
203
gamma
The curvature of an option pricing function (as a function of the value of the underlying asset).
204
geometric average
The nth root of the product of n numbers. It is used to measure the compound rate of return over time.
205
globalization
Tendency toward a worldwide investment environment, and the integration of national capital markets.
206
gross domestic product (GDP)
The market value of goods and services produced over time including the income of foreign corporations and foreign residents working in the United States, but excluding the income of U.S. residents and corporations overseas.
207
hedge fund
A private investment pool, open to institutional or wealthy investors, that is largely exempt from SEC regulation and can pursue more speculative policies than mutual funds.
208
hedge ratio (for an option)
The number of stocks required to hedge against the price risk of holding one option. Also called the option’s delta.
209
hedging
Investing in an asset to reduce the overall risk of a portfolio.
210
hedging demands
Demands for securities to hedge particular sources of consumption risk, beyond the usual mean variance diversification motivation.
211
high-frequency trading
A subset of algorithmic trading that relies on computer programs to make rapid trading decisions.
212
high water mark
The previous value of a portfolio that must be reattained before a hedge fund can charge incentive fees.
213
holding-period return
The rate of return over a given period.
214
home bias
The tendency of investors to allocate a greater share of their portfolios to domestic securities than would be the case under neutral diversification.
215
homogeneous expectations
The assumption that all investors use the same expected returns and covariance matrix of security returns as inputs in security analysis.
216
horizon analysis
Forecasting the realized compound yield over various holding periods or investment horizons.
217
illiquidity
Difficulty, cost, and/or delay in selling an asset on short notice without offering substantial price concessions.
218
illiquidity cost
Costs due to imperfect liquidity of some security.
219
illiquidity premium
Extra expected return as compensation for limited liquidity.
220
immunization
A strategy that matches durations of assets and liabilities so as to make net worth unaffected by interest rate movements.
221
implied volatility
The standard deviation of stock returns that is consistent with an option’s market value.
222
incentive fee
A fee charged by hedge funds equal to a share of any investment returns beyond a stipulated benchmark performance.
223
income beneficiary
One who receives income from a trust.
224
income statement
A financial statement showing a firm’s revenues and expenses during a specified period.
225
indenture
The document defining the contract between the bond issuer and the bondholder.
226
index arbitrage
An investment strategy that exploits divergences between actual futures prices and their theoretically correct parity values to make a profit.
227
index fund
A mutual fund holding shares in proportion to their representation in a market index such as the S&P 500.
228
index model
A model of stock returns using a market index such as the S&P 500 to represent common or systematic risk factors.
229
index option
A call or put option based on a stock market index.
230
indifference curve
A curve connecting all portfolios with the same utility according to their means and standard deviations.
231
industry life cycle
Stages through which firms typically pass as they mature.
232
inflation
The rate at which the general level of prices for goods and services is rising.
233
information ratio
Ratio of alpha to the standard deviation of diversifiable risk.
234
initial public offering
Stock issued to the public for the first time by a formerly privately owned company.
235
input list
List of parameters such as expected returns, variances, and covariances necessary to determine the optimal risky portfolio.
236
inside information
Nonpublic knowledge about a corporation possessed by corporate officers, major owners, or other individuals with privileged access to information about a firm.
237
insider trading
Trading by officers, directors, major stockholders, or others who hold private inside information allowing them to benefit from buying or selling stock.
238
insurance principle
The law of averages. The average outcome for many independent trials of an experiment will approach the expected value of the experiment.
239
interest coverage ratio
Measure of financial leverage. Earnings before interest and taxes as a multiple of interest expense.
240
interest coverage ratio, or times interest earned
A financial leverage measure (EBIT divided by interest expense).
241
interest rate
The number of dollars earned per dollar invested per period.
242
interest rate parity relation (theorem)
The spot-futures exchange rate relationship that prevails in well-functioning markets.
243
interest rate swaps
A method to manage interest rate risk where parties trade the cash flows corresponding to different securities without actually exchanging securities directly.
244
intermarket spread swap
Switching from one segment of the bond market to another (from Treasuries to corporates, for example).
245
in the money
In the money describes an option whose exercise would produce profits. Out of the money describes an option where exercise would not be profitable.
246
international financial reporting standards
Accounting standards used in many non-U.S. markets that rely more on principles and less on rules than U.S. standards.
247
intrinsic value (of a firm)
The present value of a firm’s expected future net cash flows discounted by the required rate of return.
248
intrinsic value of an option
Stock price minus exercise price, or the profit that could be attained by immediate exercise of an in-the-money option.
249
inventory turnover ratio
Cost of goods sold as a multiple of average inventory.
250
investment
Commitment of current resources in the expectation of deriving greater resources in the future.
251
investment bankers
Firms specializing in the sale of new securities to the public, typically by underwriting the issue.
252
investment company
Firm managing funds for investors. An investment company may manage several mutual funds.
253
investment-grade bond
Bond rated BBB and above or Baa and above. Lower-rated bonds are classified as speculative-grade or junk bonds.
254
investment horizon
Time horizon for purposes of investment decisions
255
investment portfolio
Set of securities chosen by an investor.
256
Jensen's alpha
The alpha of an investment
257
kurtosis
Measure of the fatness of the tails of a probability distribution. Indicates probability of observing extreme high or low values.
258
latency
The time it takes to accept, process, and deliver a trading order.
259
Law of One Price
The rule stipulating that equivalent securities or bundles of securities must sell at equal prices to preclude arbitrage opportunities.
260
leading economic indicators
Economic series that tend to rise or fall in advance of the rest of the economy.
261
leverage ratio
Ratio of debt to total capitalization of a firm.
262
LIFO
The last-in first-out accounting method of valuing
inventories.
263
limited liability
The fact that shareholders have no personal liability to the creditors of the corporation in the event of bankruptcy.
264
limit order
An order specifying a price at which an investor is willing to buy or sell a security.
265
liquidation value
Net amount that could be realized by selling the assets of a firm after paying the debt.
266
liquidity
Liquidity refers to the speed and ease with which an asset can be converted to cash.
267
liquidity preference theory
Theory that the forward rate exceeds expected future interest rates.
268
liquidity premium
Forward rate minus expected future short interest rate.
269
load
Sales charge on the purchase of some mutual funds.
270
load fund
A mutual fund with a sales commission, or load.
271
lock-up period
Period in which investors cannot redeem investments in the hedge fund.
272
lognormal distribution
The log of the variable has a normal (bell-shaped) distribution.
273
London Interbank Offered Rate (LIBOR)
Rate that most creditworthy banks charge one another for large loans of Eurodollars in the London market.
274
long position hedge
Hedging the future cost of a purchase by taking a long futures position to protect against changes in the price of the asset.
275
lower partial standard deviation
Standard deviation computed using only the portion of the probability distribution below the mean of the variable.
276
Macaulay's duration
Effective maturity of bond, equal to weighted average of the times until each payment, with weights proportional to the present value of the payment.
277
maintenance, or variation, margin
An established value below which a trader’s margin cannot fall. Reaching the maintenance margin triggers a margin call.
278
margin
Describes securities purchased with money borrowed from a broker. Current maximum margin is 50%.
279
market-book-value ratio
Ratio of price per share to book value per share.
280
market capitalization rate
The market-consensus estimate of the appropriate discount rate for a firm’s cash flows.
281
market model
Another version of the index model that breaks down return uncertainty into systematic and nonsystematic components.
282
market neutral
A strategy designed to exploit relative mispricing within a market, but which is hedged to avoid taking a stance on the direction of the broad market.
283
market order
A buy or sell order to be executed immediately at current market prices.
284
market or systemic risk, firm-specific risk
Market risk is risk attributable to common macroeconomic factors. Firm-specific risk reflects risk peculiar to an individual firm that is independent of market risk.
285
market portfolio
The portfolio for which each security is held in proportion to its market value.
286
market price of risk
A measure of the extra return, or risk premium, that investors demand to bear risk. The reward-to-risk ratio of the market portfolio.
287
market segmentation
The theory that long- and short-maturity bonds are traded in essentially distinct or segmented markets and that prices in one market do not affect those in the other.
288
market timer
An investor who speculates on broad market moves rather than on specific securities.
289
market timing
Asset allocation in which the investment in the market is increased if one forecasts that the market will outperform T-bills.
290
market-value-weighted index
An index of a group of securities computed by calculating a weighted average of the returns of each security in the index, with weights proportional to outstanding market value.
291
marking to market
Describes the daily settlement of obligations on futures positions.
292
mean-variance analysis
Evaluation of risky prospects based on the expected value and variance of possible outcomes.
293
mean-variance criterion
The selection of portfolios based on the means and variances of their returns. The choice of the higher expected return portfolio for a given level of variance or the lower variance portfolio for a given expected return.
294
mental accounting
Individuals mentally segregate assets into independent accounts rather than viewing them as part of a unified portfolio.
295
minimum-variance frontier
Graph of the lowest possible portfolio variance that is attainable for a given portfolio expected return.
296
minimum-variance portfolio
The portfolio of risky assets with lowest variance
297
modern portfolio theory (MPT)
Principles underlying analysis and evaluation of rational portfolio choices based on risk–return trade-offs and efficient diversification.
298
modified duration
Macaulay’s duration divided by 1+ yield to maturity. Measures interest rate sensitivity of bonds.
299
momentum effect
The tendency of poorly performing stocks and well-performing stocks in one period to continue that abnormal performance in following periods.
300
monetary policy
Actions taken by the Board of Governors of the Federal Reserve System to influence the money supply or interest rates.
301
money market
Includes short-term, highly liquid, and relatively low-risk debt instruments.
302
mortality tables
Tables of probability that individuals of various ages will die within a year.
303
mortgage-backed security
Ownership claim in a pool of mortgages or an obligation that is secured by such a pool. Also called a pass-through, because payments are passed along from the mortgage originator to the purchaser of the mortgage-backed security.
304
multifactor CAPM
Generalization of the basic CAPM that accounts for extra-market hedging demands.
305
multifactor models
Model of security returns positing that returns respond to several systematic factors.
306
municipal bonds
Tax-exempt bonds issued by state and local governments, generally to finance capital improvement projects. General obligation bonds are backed by the general taxing power of the issuer. Revenue bonds are backed by the proceeds from the project or agency they are issued to finance.
307
mutual fund
A firm pooling and managing funds of investors.
308
mutual fund theorem
A result associated with the CAPM, asserting that investors will choose to invest their entire risky portfolio in a market-index mutual fund.
309
NAICS codes
North American Industrial Classification System codes that use numerical values to identify industries.
310
naked option writing
Writing an option without an offsetting stock position.
311
NASDAQ
The automated quotation system for the OTC market, showing current bid ask prices for thousands of stocks.
312
neglected-firm effect
That investments in stock of less well-known firms have generated abnormal returns.
313
net asset value (NAV)
The value of each share expressed as assets minus liabilities on a per-share basis.
314
nominal interest rate
The interest rate in terms of nominal (not adjusted for purchasing power) dollars.
315
nondirectional strategy
A position designed to exploit temporary misalignments in relative pricing. Typically involves a long position in one security hedged with a short position in a related security.
316
nonsystematic risk
Nonmarket or firm-specific risk factors that can be eliminated by diversification. Also called unique risk or diversifiable risk. Systematic risk refers to risk factors common to the entire economy.
317
normal distribution
Bell-shaped probability distribution that characterizes many natural phenomena.
318
notional principal
Principal amount used to calculate swap payments.
319
on the run
Recently issued bond, selling at or near par value.
320
on-the-run yield curve
Relationship between yield to maturity and time to maturity for newly issued bonds selling at par.
321
open-end (mutual) fund
A fund that issues or redeems its own shares at their net asset value (NAV).
322
open interest
The number of futures contracts outstanding
323
optimal risky portfolio
An investor’s best combination of risky assets to be mixed with safe assets to form the complete portfolio.
324
open elasticity
The percentage increase in an option’s value given a 1% change in the value of the underlying security.
325
original issue discount bond
A bond issued with a low coupon rate that sells at a discount from par value.
326
out of the money
Out of the money describes an option where exercise would not be profitable. In the money describes an option where exercise would produce profits.
327
over-the-counter market
An informal network of brokers and dealers who negotiate sales of securities (not a formal exchange).
328
pairs trading
Stocks are paired up based on underlying similarities, and long/short positions are established to exploit any relative mispricing between each pair.
329
par value
The face value of the bond.
330
passive management
Buying a well-diversified portfolio to represent a broad-based market index without attempting to search out mispriced securities.
331
passive market-index portfolio
A market-index portfolio.
332
pass-through security
Pools of loans (such as home mortgage loans) sold in one package. Owners of pass-throughs receive all principal and interest payments made by the borrowers.
333
peak
The transition from the end of an expansion to the start of a contraction.
334
P/E effect
That portfolios of low P/E stocks have exhibited higher average risk-adjusted returns than high P/E stocks.
335
personal trust
An interest in an asset held by a trustee for the benefit of another person.
336
plowback ratio
The proportion of the firm’s earnings that is reinvested in the business (and not paid out as dividends). The plowback ratio equals 1 minus the dividend payout ratio.
337
political risk
Possibility of the expropriation of assets, changes in tax policy, restrictions on the exchange of foreign currency for domestic currency, or other changes in the business climate of a country.
338
portable alpha; alpha transfer
A strategy in which you invest in positive alpha positions, then hedge the systematic risk of that investment, and, finally, establish market exposure where you want it by using passive indexes.
339
portfolio insurance
The practice of using options or dynamic hedge strategies to provide protection against investment losses while maintaining upside potential.
340
portfolio management
Process of combining securities in a portfolio tailored to the investor’s preferences and needs, monitoring that portfolio, and evaluating its performance.
341
portfolio opportunity set
The expected return–standard deviation pairs of all portfolios that can be constructed from a given set of assets.
342
posterior distribution
Probability distribution for a variable after adjustment for empirical evidence on its likely value.
343
preferred habitat theory
Holds that investors prefer specific maturity ranges but can be induced to switch if risk premiums are sufficient.
344
preferred stock
Nonvoting shares in a corporation, paying a fixed or variable stream of dividends.
345
premium
The purchase price of an option.
346
premium bonds
Bonds selling above par value.
347
present value of growth opportunities (PVGO)
Net present value of a firm’s future investments.
348
price–earnings (P/E) ratio
The ratio of a stock’s price to
its earnings per share. Also referred to as the P/E multiple.
349
price value of a basis point
The change in the value of a fixed-income asset resulting from a 1 basis point change in the asset’s yield to maturity.
350
price-weighted average
Weighted average with weights proportional to security prices rather than total capitalization.
351
primary market
New issues of securities are offered to the public here.
352
primitive security, derivative security
A primitive security is an instrument such as a stock or bond for which payments depend only on the financial status of its issuer. A derivative security is created from the set of primitive securities to yield returns that depend on factors beyond the characteristics of the issuer and that may be related to prices of other assets.
353
principal
The outstanding balance on a loan.
354
prior distribution
Probability distribution for a variable
before adjusting for empirical evidence on its likely value.
355
private equity
Investment in a company that is not traded on a stock exchange.
356
private placement
Primary offering in which shares are sold directly to a small group of institutional or wealthy investors.
357
program trading
Coordinated buy orders and sell orders
of entire portfolios, usually with the aid of computers, often to achieve index arbitrage objectives.
358
prospect theory
Behavioral (as opposed to rational) model of investor utility. Investor utility depends on changes in wealth rather than levels of wealth.
359
prospectus
A final and approved registration statement including the price at which the security issue is offered.
360
protective covenant
A provision specifying requirements of collateral, sinking fund, dividend policy, etc., designed to protect the interests of bondholders.
361
protective put
Purchase of stock combined with a put option that guarantees minimum proceeds equal to the put’s exercise price.
362
proxy
An instrument empowering an agent to vote in the name of the shareholder.
363
prudent investor rule
An investment manager must act in accord with the actions of a hypothetical prudent investor.
364
pseudo-American call option value
The maximum of the value derived by assuming that an option will be held until expiration and the value derived by assuming that the option will be exercised just before an ex-dividend date.
365
public offering, private placement
A public offering consists of bonds sold in the primary market to the general public; a private placement is sold directly to a limited number of institutional investors.
366
pure plays
Bets on particular mispricing across two or more securities, with extraneous sources of risk such as general market exposure hedged away.
367
pure yield curve
Refers to the relationship between yield to maturity and time to maturity for zero-coupon bonds
368
pure yield pickup swap
Moving to higher-yield bonds.
369
put bond
A bond that the holder may choose either to exchange for par value at some date or to extend for a given number of years.
370
put-call parity theorem
An equation representing the proper relation between put and call prices. Violation of parity allows arbitrage opportunities.
371
put/call ratio
Ratio of put options to call options outstanding on a stock.
372
put option
The right to sell an asset at a specified exercise price on or before a specified expiration date.
373
quality of earnings
The realism and conservatism of the earnings number and the extent to which we might expect
the reported level of earnings to be sustained.
374
quick ratio
A measure of liquidity similar to the current ratio except for exclusion of inventories (cash plus receivables divided by current liabilities).
375
random walk
Describes the notion that stock price changes are random and unpredictable.
376
rate anticipation swap
A switch made in response to forecasts of interest rates.
377
real assets, financial assets
Real assets are land, buildings, and equipment that are used to produce goods and services. Financial assets are claims such as securities to the income generated by real assets.
378
real interest rate
The excess of the interest rate over the inflation rate. The growth rate of purchasing power derived from an investment.
379
realized compound return
Yield assuming that coupon payments are invested at the going market interest rate at the time of their receipt and rolled over until the bond matures.
380
rebalancing
Realigning the proportions of assets in a portfolio as needed.
381
registered bond
A bond whose issuer records ownership and interest payments. Differs from a bearer bond, which is traded without record of ownership and whose possession is its only evidence of ownership.
382
regression equation
An equation that describes the average relationship between a dependent variable and a set of explanatory variables.
383
regret avoidance
Notion from behavioral finance that individuals who make decisions that turn out badly will have more regret when that decision was more unconventional.
384
reinvestment rate risk
The uncertainty surrounding the cumulative future value of reinvested bond coupon payments.
385
REIT
Real estate investment trust, which is similar to a closed-end mutual fund. REITs invest in real estate or loans secured by real estate and issue shares in such investments.
386
relative strength
The extent to which a security has outperformed or underperformed either the market as a whole or its particular industry.
387
remainderman
One who receives the principal of a trust when it is dissolved.
388
replacement cost
Cost to replace a firm’s assets. “Reproduction” cost.
389
representativeness bias
People seem to believe that a small sample is just as representative of a broad population as a large one and therefore infer patterns too quickly.
390
repurchase agreements (repos)
Short-term, often overnight, sales of government securities with an agreement to repurchase the securities at a slightly higher price. A reverse repo is a purchase with an agreement to resell at a specified price on a future date.
391
residual claim
Refers to the fact that shareholders are at the bottom of the list of claimants to assets of a corporation in the event of failure or bankruptcy.
392
residuals
Parts of stock returns not explained by the explanatory variable (the market-index return). They measure the impact of firm-specific events during a particular period.
393
resistance level
A price level above which it is supposedly difficult for a stock or stock index to rise.
394
return on assets (ROA)
A profitability ratio; earnings before interest and taxes divided by total assets.
395
return on equity (ROE)
An accounting ratio of net profits divided by equity.
396
return on sales (ROS), or profit margin
The ratio of operating profits per dollar of sales (EBIT divided by sales).
397
reversal effect
The tendency of poorly performing stocks and well-performing stocks in one period to experience reversals in following periods.
398
reversing trade
Entering the opposite side of a currently held futures position to close out the position.
399
reward-to-volatility ratio
Ratio of excess return to portfolio standard deviation.
400
riding the yield curve
Buying long-term bonds in anticipation of capital gains as yields fall with the declining maturity of the bonds.
401
risk arbitrage
Speculation on perceived mispriced securities, usually in connection with merger and acquisition targets.
402
risk-averse, risk-neutral, risk lover
A risk-averse investor will consider risky portfolios only if they provide compensation for risk via a risk premium. A risk-neutral investor finds the level of risk irrelevant and considers only the expected return of risk prospects. A risk lover is willing to accept lower expected returns on prospects with higher amounts of risk.
403
risk-free asset
An asset with a certain rate of return; often taken to be short-term T-bills.
404
risk-free rate
The interest rate that can be earned with certainty.
405
risk pooling
Investing the portfolio in many risky assets.
406
risk premium
An expected return in excess of that on risk-free securities. The premium provides compensation
for the risk of an investment.
407
risk–return trade-off
Investors must take on greater risk if they want higher expected returns.
408
risk sharing
Sharing the risk of a portfolio of given size among many investors.
409
risky asset
An asset with an uncertain rate of return.
410
scatter diagram
Plot of returns of one security versus returns of another security. Each point represents one pair
of returns for a given holding period.
411
seasoned new issue
Stock issued by companies that already have stock on the market.
412
secondary market
Already existing securities are bought and sold on the exchanges or in the OTC market.
413
second-pass regression
A cross-sectional regression of portfolio returns on betas. The estimated slope is the measurement of the reward for bearing systematic risk during the period.
414
sector rotation
An investment strategy which entails shifting the portfolio into industry sectors that are forecast to outperform others based on macroeconomic forecasts.
415
securitization
Pooling loans for various purposes into standardized securities backed by those loans, which can then be traded like any other security.
416
security analysis
Determining correct value of a security in the marketplace.
417
security characteristic line
A plot of the excess return on a security over the risk-free rate as a function of the excess return on the market.
418
security market line (SML)
Graphical representation of the expected return–beta relationship of the CAPM.
419
security selection decision
Choosing the particular securities to include in a portfolio.
420
separation property
The property that portfolio choice can be separated into two independent tasks: (1) determina- tion of the optimal risky portfolio, which is a purely techni- cal problem, and (2) the personal choice of the best mix of the risky portfolio and the risk-free asset.
421
Sharpe ratio
Reward-to-volatility ratio; ratio of portfolio excess return to standard deviation
422
shelf registration
Advance registration of securities with the SEC for sale up to 2 years following initial registration.
423
short position or hedge
Protecting the value of an asset held by taking a short position in a futures contract.
424
short rate
A one-period interest rate.
425
short sale
The sale of shares not owned by the investor but borrowed through a broker and later repurchased to replace the loan. Profit is earned if the initial sale is at a higher price than the repurchase price.
426
single-factor model
A model of security returns that acknowledges only one common factor. See factor model.
427
single-index model
A model of stock returns that decomposes influences on returns into a systematic factor, as measured by the return on a broad market index, and firm-specific factors.
428
single-stock futures
Futures contracts on single stock rather than an index.
429
sinking fund
A procedure that allows for the repayment of principal at maturity by calling for the bond issuer to repurchase some proportion of the outstanding bonds either in the open market or at a special call price associated with the sinking fund provision.
430
skew
Measure of the asymmetry of a probability distribution.
431
small-firm effect
That investments in stocks of small firms
appear to have earned abnormal returns.
432
soft dollars
The value of research services that brokerage houses supply to investment managers “free of charge” in exchange for the investment managers’ business.
433
Sortino ratio
Excess return divided by lower partial standard deviation.
434
specialist
A trader who makes a market in the shares of one or more firms and who maintains a “fair and orderly market” by dealing personally in the stock.
435
speculation
Undertaking a risky investment with the objective of earning a greater profit than an investment in a risk-free alternative (a risk premium).
436
speculative-grade bond
Bond rated Ba or lower by Moody’s, or BB or lower by Standard & Poor’s, or an unrated bond.
437
spot-futures parity theorem, or cost-of-carry relationship
Describes the theoretically correct relationship between spot and futures prices. Violation of the parity relationship gives rise to arbitrage opportunities.
438
spot rate
The current interest rate appropriate for discounting a cash flow of some given maturity.
439
spread (futures)
Taking a long position in a futures contract of one maturity and a short position in a contract of different maturity, both on the same commodity.
440
spread (options)
A combination of two or more call options or put options on the same stock with differing exercise prices or times to expiration. A money spread refers to a spread with different exercise price; a time spread refers to differing expiration date.
441
standard deviation
Square root of the variance.
442
statement of cash flows
A financial statement showing a firm’s cash receipts and cash payments during a specified period.
443
statistical arbitrage
Use of quantitative systems to uncover many perceived misalignments in relative pricing and ensure profit by averaging over all of these small bets.
444
stock exchanges
Secondary markets where already-issued securities are bought and sold by members.
445
stock selection
An active portfolio management technique that focuses on advantageous selection of particular stocks rather than on broad asset allocation choices.
446
stock split
Issue by a corporation of a given number of shares in exchange for the current number of shares held by stockholders. Splits may go in either direction, either increasing or decreasing the number of shares outstanding. A reverse split decreases the number outstanding.
447
stop-loss order
A sell order to be executed if the price of the stock falls below a stipulated level.
448
stop orders
Order to trade contingent on security price designed to limit losses if price moves against the trader.
449
straddle
A combination of buying both a call and a put on the same asset, each with the same exercise price and expiration date. The purpose is to profit from expected volatility.
450
straight bond
A bond with no option features such as callability or convertibility.
451
street name
Describes securities held by a broker on behalf of a client but registered in the name of the firm.
452
strip, strap
Variants of a straddle. A strip is two puts and one call on a stock; a strap is two calls and one put, both with the same exercise price and expiration date.
453
stripped of coupons
Describes the practice of some investment banks that sell “synthetic” zero-coupon bonds by marketing the rights to a single payment backed by a coupon-paying Treasury bond.
454
subordination clause
A provision in a bond indenture that restricts the issuer’s future borrowing by subordinating the new leaders’ claims on the firm to those of the existing bond holders. Claims of subordinated or junior debtholders are not paid until the prior debt is paid.
455
substitution swap
Exchange of one bond for a bond with similar attributes but more attractively priced.
456
supply shock
An event that influences production capacity and costs in the economy.
457
support level
A price level below which it is supposedly difficult for a stock or stock index to fall.
458
survivorship bias
Bias in the average returns of a sample of funds induced by excluding past returns on funds that left the sample because they happened to be unsuccessful.
459
swaption
An option on a swap.
460
systemic risk
Risk of breakdown in the financial system, particularly due to spillover effects from one market into others.
461
systematic risk
Risk factors common to the whole economy, nondiversifiable risk; also called market risk.
462
tax anticipation notes
Short-term municipal debt to raise funds to pay for expenses before actual collection of taxes.
463
tax-deferral option
The feature of the U.S. Internal Revenue Code that the capital gains tax on an asset is payable only when the gain is realized by selling the asset.
464
tax-deferred retirement plans
Employer-sponsored and other plans that allow contributions and earnings to be made and accumulate tax-free until they are paid out as benefits.
465
tax swap
Swapping two similar bonds to receive a tax benefit.
466
technical analysis
Research to identify mispriced securities that focuses on recurrent and predictable stock price patterns and on proxies for buy or sell pressure in the market.
467
tender offer
An offer from an outside investor to shareholders of a company to purchase their shares at a stipulated price, usually substantially above the market price, so that the investor may amass enough shares to obtain control of the company.
468
term insurance
Provides a death benefit only, no build-up or cash value
469
term premiums
Excess of the yields to maturity on long-term bonds over those of short-term bonds.
470
term structure of interest rates
The pattern of interest rates appropriate for discounting cash flows of various maturities.
471
times interest earned
Ratio of profits to interest expense.
472
time value (of an option)
The part of the value of an option that is due to its positive time to expiration. Not to be confused with present value or the time value of money.
473
time-weighted average
An average of the period-by-period holding-period returns of an investment.
474
Tobin’s q.
Ratio of market value of the firm to replacement cost.
475
total asset turnover
The annual sales generated by each dollar of assets (sales/assets).
476
tracking error
The difference between the return on a specified portfolio and that of a benchmark portfolio designed to mimic that portfolio.
477
tracking portfolio
A portfolio constructed to have returns with the highest possible correlation with a systematic risk factor.
478
Treasury bill
Short-term, highly liquid government securities issued at a discount from the face value and returning the face amount at maturity.
479
Treasury bond or note
Debt obligations of the federal government that make semiannual coupon payments and are issued at or near par value.
480
Treynor’s measure
Ratio of excess return to beta.
481
trin statistic
Ratio of average trading volume in declining stocks to average volume in advancing stocks. Used in technical analysis.
482
trough
The transition point between recession and recovery.
483
turnover
The ratio of the trading activity of a portfolio to the assets of the portfolio.
484
12b-1 fees
Annual fees charged by a mutual fund to pay for marketing and distribution costs.
485
underwriters
Investment bankers who help companies issue their securities to the public.
486
underwriting, underwriting syndicate
Underwriters (investment bankers) purchase securities from the issuing company and resell them. Usually a syndicate of investment bankers is organized behind a lead firm.
487
unemployment rate
The ratio of the number of people classified as unemployed to the total labor force.
488
unit investment trust
Money invested in a portfolio whose composition is fixed for the life of the fund. Shares in a unit trust are called redeemable trust certificates, and they are sold at a premium above net asset value.
489
universal life policy
An insurance policy that allows for a varying death benefit and premium level over the term of the policy, with an interest rate on the cash value that changes with market interest rates.
490
utility
The measure of the welfare or satisfaction of an investor.
491
utility value
The welfare a given investor assigns to an investment with a particular return and risk.
492
value at risk (VaR)
Measure of downside risk. The loss that will be incurred in the event of an extreme adverse price
change with some given, typically low, probability.
493
variable annuities
Annuity contracts in which the insurance company pays a periodic amount linked to the investment performance of an underlying portfolio.
494
variable life policy
An insurance policy that provides a fixed death benefit plus a cash value that can be invested in a variety of funds from which the policyholder can choose.
495
variance
A measure of the dispersion of a random variable. Equals the expected value of the squared deviation from the mean.
496
vega
Response of option price to change in standard
deviation of underlying asset.
497
venture capital
Money invested to finance a new, not yet publicly-traded firm.
498
views
An analyst’s opinion on the likely performance of a stock or sector compared to the market-consensus expectation.
499
volatility risk
The risk in the value of options portfolios due to unpredictable changes in the volatility of the underlying asset.
500
warrant
An option issued by the firm to purchase shares of the firm’s stock.
501
well-diversified portfolio
A portfolio spread out over many securities in such a way that the weight in any security is close to zero.
502
whole-life insurance policy
Provides a death benefit and a kind of savings plan that builds up cash value for possible future withdrawal.
503
workout period
Realignment period of a temporary misaligned yield relationship.
504
world investable wealth
The part of world wealth that is traded and is therefore accessible to investors.
505
writing a call
Selling a call option.
506
yield curve
A graph of yield to maturity as a function of time to maturity.
507
yield to maturity
A measure of the average rate of return that will be earned on a bond if held to maturity.
508
zero-beta portfolio
The minimum-variance portfolio uncorrelated with a chosen efficient portfolio.
509
zero-coupon bond
A bond paying no coupons that sells at a discount and provides payment of face value only at maturity.
510
zero-investment portfolio
A portfolio of zero net value, established by buying and shorting component securities, usually in the context of an arbitrage strategy.
