Todo Flashcards
Active risk
Standard deviation of active returns
Active risk squared
The variance of active risks
Absolute convergence
The idea that developing countries, regardless of their particular characteristics, will eventually catch up with the developed countries and match them in per capita output
Absolute version of PPP
An extension of the law of one price whereby the prices of goods and services will not differ internationally once exchange rates are considered
Accuracy
The percentage of correctly predicted classes out of total predictions
Activation function
A functional part of a neural network node that transforms the total net input received into the final input of the node, the activation function operates like a light dimmer switch that decreases or increases the strength of the input
Active factor risk
The contribution to active risk squared resulting from the portfolio different-than-benchmark exposures relative to factors specified in the risk model
Active return
The return on a portfolio minus the return in the portfolio 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 share
A measure of how similar a portfolio is to its benchmark. A manager who precisely replicates the benchmark will have an active share of zero; a manager with no holdings in
common with the benchmark will have an active share of one.
Active specific risk
The contribution to active risk squared resulting from the portfolio active weights on individual assets as those weights interact with assetsÕ residual risk.
Adjusted funds from operations (AFFO)
Funds from operations adjusted to remove any non-cash rent reported under straight-line rent accounting and to subtract maintenance-type capital expenditures and leasing costs,
including leasing agentscommissions and tenantsÕ improvement allowances.
Adjusted present value
As an approach to valuing a company, the sum of the value of the company, assuming no use of debt, and the net present value of any effects of debt on company value.
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 managers have in the company, the less their share in bearing the cost of excessive perquisite consumptiononsequently, the less their desire to give their best
efforts in running the company
Agency issues
Conflicts of interest that arise when the agent in an agency relationship has goals and incentives that differ from the principal to whom the agent owes a fiduciary duty. Also called
agency problems or principalgent problems
Agglomerative clustering
A bottom-up hierarchical clustering method that begins with each observation being treated as its own cluster. The algorithm finds the two closest clusters, based on some measure of distance (similarity), and combines them into one new larger cluster. This process is repeated iteratively until all observations are clumped into a single large cluster
Alpha
The return on an asset in excess of the asset required rate of return; the risk-adjusted return.
Arbitrage-free models
Term structure models that project future interest rate paths that emanate from the existing term structure. Resulting prices are based on a no-arbitrage condition.
Asset-based approach
Approach that values a private company based on the values of the underlying assets of the entity less the value of any related liabilities.
Asset-based valuation
An approach to valuing natural resource companies that estimates company value on the basis of the market value of the natural resources the company controls.
Asset beta
The unlevered beta; reflects the business risk of the assets; the asset systematic risk
Asymmetric information
The differential of information between corporate insiders and outsiders regarding the company performance and prospects. Managers typically have more information about the company’s performance and prospects than owners and creditors.
Authorized participants
(APs) A special group of institutional investors who are authorized by the ETF issuer to participate in the creation/redemption process. APs are large broker/dealers, often market
makers.
Autocorrelations
The correlations of a time series with its own past values
Autoregressive model (AR)
A time series regressed on its own past values in which the independent variable is a lagged value of the dependent variable.
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 futures markets in which the spot price exceeds the futures price; also, the condition in which the near-term (closer to expiration) futures contract price is higher than the longer-term futures contract price.
Barbell portfolio
Fixed-income portfolio that combines short and long maturities
Base error
Model error due to randomness in the data.
Basis
The difference between the spot price and the futures price. As the maturity date of the futures contract nears, the basis converges toward zero.
Bear hug
A tactic used by acquirers to circumvent target management objections to a proposed merger by submitting the proposal directly to the target company’s board of directors.
Bearish flattening
Term structure shift in which short-term bond yields rise more than long-term bond yields, resulting in a flatter yield curve
Bias error
Describes the degree to which a model fits the training data. Algorithms with erroneous assumptions produce high bias error with poor approximation, causing underfitting and high in-sample error.
Bond indenture
A legal contract specifying the terms of a bond issue.
Bond risk premium
The expected excess return of a default-free long-term bond less that of an equivalent short-term bond.
Bond yield plus risk premium method
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 stock relative to its bonds. The additional yield is often estimated using historical spreads between bond yields and stock yields.
Bonding costs
Costs borne by management to assure owners that they are working in the ownersbest interest (e.g., implicit cost of non-compete agreements).
Book value
Shareholdersequity (total assets minus total liabilities) minus the value of preferred stock; common shareholders equity.
Book value of equity
Shareholdersequity (total assets minus total liabilities) minus the value of preferred stock; common shareholders equity.
Bootstrap aggregating (or bagging)
A technique whereby the original training dataset is used to generate n new training datasets or bags of data. Each new bag of data is generated by random sampling with
replacement from the initial training set.
Bootstrapping
The use of a forward substitution process to determine zero-coupon rates by using the par yields and solving for the zero-coupon rates one by one, from the shortest to longest maturities.
Breakup value
The value derived using a sum-of-the-parts valuation.
Breuschagan test
A test for conditional heteroskedasticity in the error term of a regression.
Bullet portfolio
A fixed-income portfolio concentrated in a single maturity.
Bullish flattening
Term structure change in which the yield curve flattens in response to a greater decline in long-term rates than short-term rates.
Bullish steepening
Term structure change in which short-term rates fall by more than long-term yields, resulting in a steeper term structure.
Callable bond
Bond that includes an embedded call option that gives the issuer the right to redeem the bond issue prior to maturity, typically when interest rates have fallen or when the issuer credit quality has improved.
Capital deepening
An increase in the capital-to-labor ratio.
Capital rationing
A capital rationing environment assumes that the company has a fixed amount of funds to invest.
Capped floater
Floating-rate bond with a cap provision that prevents the coupon rate from increasing above a specified maximum rate. It protects the issuer against rising interest rates.
Carry arbitrage model
A no-arbitrage approach in which the underlying instrument is either bought or sold along with an opposite position in a forward contract.
Carry costs
Costs that arise from owning certain underlyings. They are generally a function of the physical characteristics of the underlying asset and also the interest forgone on the funds tied up in the asset.
CDS spread
A periodic premium paid by the buyer to the seller that serves as a return over a market reference rate required to protect against credit risk.
Categorical dependent variables
An alternative term for qualitative dependent variables.
Centroid
The center of a cluster formed using the k-means clustering algorithm
Cheapest-to-deliver
The debt instrument that can be purchased and delivered at the lowest cost yet has the same seniority as the reference obligation
Classification and regression tree
A supervised machine learning technique that can be applied to predict either a categorical target variable, producing a classification tree, or a continuous target variable, producing a regression tree. CART is commonly applied to binary classification or regression.
Clean surplus relation
The relationship between earnings, dividends, and book value in which ending book value is equal to the beginning book value plus earnings less dividends, apart from ownership transactions.
Club convergence
The idea that only rich and middle-income countries sharing a set of favorable attributes (i.e., are members of the club) will converge to the income level of the richest countries.
Cluster
A subset of observations from a dataset such that all the observations within the same cluster are deemed imilar.
Cobbouglas production function
A function of the form Y = K_ L1__ relating output (Y) to labor (L) and capital (K) inputs.
Coefficient of determination
The percentage of the variation of the dependent variable that is explained by the independent variable. Also referred to as the R-squared or R2.
Collateral return
The component of the total return on a commodity futures position attributable to the yield for the bonds or cash used to maintain the futures position. Also called collateral yield
Collection frequency (CF)
The number of times a given word appears in the whole corpus (i.e., collection of sentences) divided by the total number of words in the corpus.
Commercial real estate properties
Income-producing real estate properties; properties purchased with the intent to let, lease, or rent (in other words, produce income).
Comprehensive income
All changes in equity other than contributions by, and distributions to, owners; income under clean surplus accounting; 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 convergence
The idea that convergence of per capita income is conditional on the countries having the same savings rate, population growth rate, and production function.
Conditional heteroskedasticity
Heteroskedasticity in the error variance that is correlated with the values of the independent variable(s) in the regression.
Conditional VaR (CVaR)
The weighted average of all loss outcomes in the statistical (i.e., return) distribution that exceed the VaR loss. Thus, CVaR is a more comprehensive measure of tail loss than VaR is. Sometimes referred to as the expected tail loss or expected shortfall .
Confusion matrix
A grid used for error analysis in classification problems, it presents values for four evaluation metrics including true positive (TP), false positive (FP), true negative (TN), and false negative (FN).
Consolidation
The combining of the results of operations 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 intercompany transactions.
Constant dividend payout ratio policy
A policy in which a constant percentage of net income is paid out in dividends
Contango
A condition in futures markets in which the spot price is lower than the futures price; also, the condition in which the near-term (closer to expiration) futures contract price is lower than the longer-term futures contract price.
Continuing earnings
Earnings excluding nonrecurring components. Also referred to as core earnings , persistent earnings , or underlying earnings .
Continuing residual income
Residual income after the forecast horizon.
Control premium
An increment or premium to value associated with a controlling ownership interest in a company
Conversion period
For a convertible bond, the period during which bondholders have the right to convert their bonds into shares
Conversion price
For a convertible bond, the price per share at which the bond can be converted into shares.
Conversion rate (or ratio)
For a convertible bond, the number of shares of common stock that a bondholder receives from converting the bond into shares.
Conversion value
For a convertible bond, the value of the bond if it is converted at the market price of the shares. Also called parity value.
Convertible bond
Bond with an embedded conversion option that gives bondholders the right to convert their bonds into the issuer common stock during a pre-determined period at a pre-determined price.
Convexity
A measure of how interest rate sensitivity changes with a change in interest rates.
Corpus
A collection of text data in any form, including list, matrix, or data table forms.
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 interest rate parity
The relationship among the spot exchange rate, the forward exchange rate, and the interest rates in two currencies that ensures that the return on a hedged (i.e., covered) foreign risk-free investment is the same as the return on a domestic risk-free investment. Also called interest rate parity.
Cox-Ingersoll-Ross model
A general equilibrium term structure model that assumes interest rates are mean reverting and interest rate volatility is directly related to the level of interest rates.
Creation/redemption
The process in which ETF shares are created or redeemed by authorized participants transacting with the ETF issuer.
Creation units
Large blocks of ETF shares transacted between the authorized participant (AP) and the ETF manager that are usually but not always equal to 50,000 shares of the ETF.
Credit event
The event that triggers a payment from the credit protection seller to the credit protection buyer.
Credit risk
The risk that the borrower will not repay principal and interest. Also called default risk
Cross-validation
A technique for estimating out-of-sample error directly by determining the error in validation samples
Current rate method
Approach to translating foreign currency financial statements for consolidation in which all assets and liabilities are translated at the current exchange rate. The current rate method is the prevalent method of translation.
Data mining
The practice of determining a model by extensive searching through a dataset for statistically significant patterns
Data preparation (cleansing)
The process of examining, identifying, and mitigating (i.e., cleansing) errors in raw data
Data snooping
The subconscious or conscious manipulation of data in a way that produces a statistically significant result (i.e., the p-value is sufficiently small or the t-statistic sufficiently large to indicate statistical significance), such as by running multiple simulations and naively accepting the best result. Also known as p-hacking.
Data wrangling (preprocessing)
This task performs transformations and critical processing steps on cleansed data to make the data ready for ML model training (i.e., preprocessing), and includes dealing with outliers, extracting useful variables from existing data points, and scaling the data.
Deep learning
Algorithms based on deep neural networks, ones with many hidden layers (more than two), that address highly complex tasks, such as image classification, face recognition, speech recognition, and natural language processing.
Deep neural networks
Neural networks with many hidden layerst least 2 but potentially more than 20 that have proven successful across a wide range of artificial intelligence applications.
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 of the plan assets.
Defined contribution pension plans
Individual accounts to which an employee and typically the employer makes contributions, generally on a tax-advantaged basis. The amounts of contributions are defined at the outset, but the future value of the benefit is unknown. The employee bears the investment risk of the plan assets
Delta
The relationship between the option price and the underlying price, which reflects the sensitivity of the price of the option to changes in the price of the underlying. Delta is a good approximation of how an option price will change for a small change in the stock.
Diluted earnings per share
(Diluted EPS)Net income, minus preferred dividends, divided by the weighted average number of common shares outstanding considering all dilutive securities (e.g., convertible debt and options); the EPS that would result if all dilutive securities were converted into common shares
Direct capitalization method
In the context of real estate, this method estimates the value of an income-producing property based on the level and quality of its net operating income.
Discount factor
The present value or price of a risk-free single-unit payment when discounted using the appropriate spot rate
Dividend coverage ratio
The ratio of net income to dividends.
Dividend discount model
(DDM) A present value model of stock value that views the intrinsic value of a stock as present value of the stock expected future dividends
Dividend displacement of earnings
The concept that dividends paid now displace earnings in all future periods.
Dividend imputation tax system
A taxation system that effectively assures corporate profits distributed as dividends are taxed just once and at the shareholder tax rate.
Dividend payout ratio
The ratio of cash dividends paid to earnings for a period
Divisive clustering
A top-down hierarchical clustering method that starts with all observations belonging to a single large cluster. The observations are then divided into two clusters based on some measure of distance (similarity). The algorithm then progressively partitions the intermediate clusters into smaller ones until each cluster contains only one observation.
Document frequency (DF)
The number of documents (texts) that contain a particular token divided by the total number of documents. It is the simplest feature selection method and often performs well when many thousands of tokens are present
Document term matrix (DTM)
A matrix where each row belongs to a document (or text file), and each column represents a token (or term). The number of rows is equal to the number of documents (or text files) in a sample text dataset. The number of columns is equal to the number of tokens from the BOW built using all the documents in the sample dataset. The cells typically contain the counts of the number of times a token is present in each document
Double taxation system
Corporate earnings are taxed twice when paid out as dividends. First, corporate pretax earnings are taxed regardless of whether they will be distributed as dividends or retained at the corporate level. Second, dividends are taxed again at the individual shareholder level
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
Duration
A measure of the approximate sensitivity of a security to a change in interest rates (i.e., a measure of interest rate risk).
Dutch disease
A situation in which currency appreciation driven by strong export demand for resources makes other segments of the economy (particularly manufacturing) globally uncompetitive.
Earnings yield
EPS divided by price; the reciprocal of the P/E.
Economic profit
Residual income
Economic value added
(EVA®) A commercial implementation of the residual income concept; the computation of EVA ® is the net operating profit after taxes minus the cost of capital, where these inputs are adjusted for a number of items
Effective convexity
Sensitivity of duration to changes in interest rates.
Effective duration
Sensitivity of the bond price to a 100 bps parallel shift of the benchmark yield curve, assuming no change in the bondÕs credit spread.
Effective spread
Two times the difference between the execution price and the midpoint of the market quote at the time an order is entered
Enterprise value
Total company value (the market value of debt, common equity, and preferred equity) minus the value of cash and investments.
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 REITs
REITs that own, operate, and/or selectively develop income-producing real estate.
Equity swap
A swap transaction in which at least one cash flow is tied to the return on an equity portfolio position, often an equity index.
Error term
The difference between an observation and its expected value, where the expected value is based on the true underlying population relation between the dependent and independent variables. Also known simply as the error
Ex ante version of PPP
The hypothesis that expected changes in the spot exchange rate are equal to expected differences in national inflation rates. An extension of relative purchasing power parity to expected future changes in the exchange rate
Excess earnings method
Income approach that estimates the value of all intangible assets of the business by capitalizing future earnings in excess of the estimated return requirements associated with working capital and fixed assets
Expanded CAPM
An adaptation of the CAPM that adds to the CAPM a premium for small size and company-specific risk
Exploratory data analysis (EDA)
The preliminary step in data exploration, where graphs, charts, and other visualizations (heat maps and word clouds) as well as quantitative methods (descriptive statistics and central tendency measures) are used to observe and summarize data.
Fair value
The amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale. As defined in IFRS and US GAAP, it is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
First-differencing
A transformation that subtracts the value of the time series in period t _ 1 from its value in period t.
Flip-in pill
A poison pill takeover defense that dilutes an acquirer ownership in a target by giving other existing target company shareholders the right to buy additional target company shares at a discount.
Flip-over pill
A poison pill takeover defense that gives target company shareholders the right to purchase shares of the acquirer at a significant discount to the market price, which has the effect of causing dilution to all existing acquiring company shareholders
Floored floater
Floating-rate bond with a floor provision that prevents the coupon rate from decreasing below a specified minimum rate. It protects the investor against declining interest rates
Forward rate parity
The proposition that the forward exchange rate is an unbiased predictor of the future spot exchange rate.
Free cash flow
The actual cash that would be available to the company investors after making all investments necessary to maintain the company as an ongoing enterprise (also referred to as free cash flow to the firm); the internally generated funds that can be distributed to the companys investors (e.g., shareholders and bondholders) without impairing the value of the company.
Free cash flow to equity
The cash flow available to a company common shareholders after all operating expenses, interest, and principal payments have been made and necessary investments in working and fixed capital have been made.
Free cash flow to the firm
The cash flow available to the company suppliers of capital after all operating expenses (including taxes) have been paid and necessary investments in working and fixed capital have been made
Funds from operations (FFO)
Net income (computed in accordance with generally accepted accounting principles) plus (1) gains and losses from sales of properties and (2) depreciation and amortization.
Gamma
A measure of how sensitive an option delta is to a change in the underlying. The change in a given instrumentÕs delta for a given small change in the underlyingÕs value, holding everything else constant
Goodwill
An intangible asset that represents the excess of the purchase price of an acquired company over the value of the net identifiable assets acquired
Green bond
Bonds in which the proceeds are designated by issuers to fund a specific project or portfolio of projects that have environmental or climate benefits
Greenmail
The purchase of the accumulated shares of a hostile investor by a company that is targeted for takeover by that investor, usually at a substantial premium over market price
Greenwashing
The risk that a green bond proceeds are not actually used for a beneficial environmental or climate-related project
Grid search
A method of systematically training a model by using various combinations of hyperparameter values, cross validating each model, and determining which combination of hyperparameter values ensures the best model performance.
Gross lease
A lease under which the tenant pays a gross rent to the landlord, who is responsible for all operating costs, utilities, maintenance expenses, and real estate taxes relating to the
property
Guideline assets
Assets used as benchmarks when applying the method of comparables to value an asset.
Guideline public companies
Public-company comparables for the company being valued
Guideline public company method
A variation of the market approach; establishes a value estimate based on the observed multiples from trading activity in the shares of public companies viewed as reasonably comparable to the subject private company
Guideline transactions method
A variation of the market approach; establishes a value estimate based on pricing multiples derived from the acquisition of control of entire public or private companies that were acquired
Hazard rate
The probability that an event will occur, given that it has not already occurred
Hedonic index
Unlike a repeat-sales index, a hedonic index does not require repeat sales of the same property. It requires only one sale. The way it controls for the fact that different properties are selling each quarter is to include variables in the regression that control for differences in the characteristics of the property, such as size, age, quality of construction, and location
Heteroskedastic
With reference to the error term of regression, having a variance that differs across observations
Heteroskedasticity
The property of having a nonconstant variance; refers to an error term with the property that its variance differs across observations
Hierarchical clustering
An iterative unsupervised learning procedure used for building a hierarchy of clusters.
Holdout samples
Data samples that are not used to train a model.
Homoskedasticity
The property of having a constant variance; refers to an error term that is constant across observations.
Horizontal merger
A merger involving companies in the same line of business, usually as competitors
Hybrid approach
With respect to forecasting, an approach that combines elements of both top-down and bottom-up analyses
Hyperparameter
A parameter whose value must be set by the researcher before learning begins
I-spreads
Shortened form of nterpolated spreads and a reference to a linearly interpolated yield
Impairment
Diminishment in value as a result of carrying (book) value exceeding fair value and/or recoverable value.
Income approach
A valuation approach that values an asset as the present discounted value of the income expected from it. In the context of real estate, this approach estimates the value of a property based on an expected rate of return. The estimated value is the present value of the expected future income from the property, including proceeds from resale at the end of a typical investment holding period.
Incremental VaR (IVaR)
A measure of the incremental effect of an asset on the VaR of a portfolio by measuring the difference between the portfolio VaR while including a specified asset and the portfolios VaR with that asset eliminated
Indenture
A written contract between a lender and borrower that specifies the terms of the loan, such as interest rate, interest payment schedule, or maturity
Independent board directors
Directors with no material relationship with the company with regard to employment, ownership, or remuneration
Independent regulators
Regulators recognized and granted authority by a government body or agency. They are not government agencies per se and typically do not rely on government funding.
Index CDS
A type of credit default swap that involves a combination of borrowers
Information ratio
(IR) Mean active return divided by active risk; or alpha divided by the standard deviation of diversifiable risk.
Internal rate of return
Abbreviated as IRR. Rate of return that discounts future cash flows from an investment to the exact amount of the investment; the discount rate that makes the present value of an investment costs (outflows) equal to the present value of the investments benefits (inflows)
Intrinsic value
The value of an asset given a hypothetically complete understanding of the asset investment characteristics; the value obtained if an option is exercised based on current conditions. The difference between the spot exchange rate and the strike price of a currency
ISDA Master Agreement
A standard or master agreement published by the International Swaps and Derivatives Association. The master agreement establishes the terms for each party involved in the transaction
K-means
A clustering algorithm that repeatedly partitions observations into a fixed number, k, of non-overlapping clusters
K-nearest neighbor
A supervised learning technique that classifies a new observation by finding similarities (earnessÓ) between this new observation and the existing data
Key rate durations
Sensitivity of a bond price to changes in specific maturities on the benchmark yield curve. Also called partial durations
Labeled dataset
A dataset that contains matched sets of observed inputs or features (X ) and the associated output or target (Y ).
Labor productivity
The quantity of real GDP produced by an hour of labor. More generally, output per unit of labor input.
Labor productivity growth accounting equation
States that potential GDP growth equals the growth rate of the labor input plus the growth rate of labor productivity.
LASSO
Least absolute shrinkage and selection operator is a type of penalized regression which involves minimizing the sum of the absolute values of the regression coefficients. LASSO can also be used for regularization in neural networks.
Latency
The elapsed time between the occurrence of an event and a subsequent action that depends on that event.
Law of one price
A principle that states that if two investments have the same or equivalent future cash flows regardless of what will happen in the future, then these two investments should have the same current price
Libor-OIS spread
The difference between Libor and the overnight indexed swap rate
Lin-log model
A regression model in which the independent variable is in logarithmic form
Liquidity premium
The premium or incrementally higher yield that investors demand for lending long term
Log-lin model
A regression model in which the dependent variable is in logarithmic form.
Log-linear model
With reference to time-series models, a model in which the growth rate of the time series as a function of time is constant
Log-log model
A regression model in which both the dependent and independent variables are in logarithmic form. Also known as the double-log model.
Log-log regression model
A regression that expresses the dependent and independent variables as natural logarithms
Logistic regression (logit model)
A qualitative-dependent-variable multiple regression model based on the logistic probability distribution.
Long/short credit trade
A credit protection seller with respect to one entity combined with a credit protection buyer with respect to another entity.
Macroeconomic factor model
A multifactor model in which the factors are surprises in macroeconomic variables that significantly explain equity returns.
Managerialism theories
Theories that posit that corporate executives are motivated to engage in mergers to maximize the size of their company rather than shareholder value (a form of agency cost).
Marginal VaR (MVaR)
A measure of the effect of a small change in a position size on portfolio VaR.
Market conversion premium per share
For a convertible bond, the difference between the market conversion price and the underlying share price, which allows investors to identify the premium or discount payable when buying a convertible bond rather than the underlying common stock
Market conversion premium ratio
For a convertible bond, the market conversion premium per share expressed as a percentage of the current market price of the shares.
Market fragmentation
Trading the same instrument in multiple venues
Market timing
Asset allocation in which the investment in the market is increased if one forecasts that the market will outperform T-bills
Maximum drawdown
The worst cumulative loss ever sustained by an asset or portfolio. More specifically, maximum drawdown is the difference between an asset or a portfolioÕs maximum cumulative return and its subsequent lowest cumulative return
Mean reversion
The tendency of a time series to fall when its level is above its mean and rise when its level is below its mean; a mean-reverting time series tends to return to its long-term mean.
Mean square error (MSE)
The sum of squares error divided by the degrees of freedom, n _ k _ 1; in a simple linear regression, n - k - 1 = n - 2.
Mean square regression (MSR)
The sum of squares regression divided by the number of independent variables k; in a simple linear regression, k = 1.
Metadata
Data that describes and gives information about other data
Minority interest
The proportion of the ownership of a subsidiary not held by the parent (controlling) company
Molodovsky effect
The observation that P/Es tend to be high on depressed EPS at the bottom of a business cycle and tend to be low on unusually high EPS at the top of a business cycle.
Monetary assets and liabilities
Assets and liabilities with value equal to the amount of currency contracted for, a fixed amount of currency. Examples are cash, accounts receivable, accounts payable, bonds payable, and mortgages payable. Inventory is not a monetary asset. Most liabilities are monetary.
Monte Carlo simulation
A technique that uses the inverse transformation method for converting a randomly generated uniformly distributed number into a simulated value of a random variable of a desired distribution. Each key decision variable in a Monte Carlo simulation requires an assumed statistical distribution; this assumption facilitates incorporating non-normality, fat tails, and tail dependence as well as solving high-dimensionality problems
Multicollinearity
A regression assumption violation that occurs when two or more independent variables (or combinations of independent variables) are highly but not perfectly correlated with each other.
Net asset value
The difference between assets and liabilities, all taken at current market values instead of accounting book values.
Net lease
A lease under which the tenant pays a net rent to the landlord and an additional amount based on the tenant pro rata share of the operating costs, utilities, maintenance expenses, and real estate taxes relating to the property.
Net operating income
Gross rental revenue minus operating costs but before deducting depreciation, corporate overhead, and interest expense. In the context of real estate, a measure of the income from the property after deducting operating expenses for such items as property taxes, insurance, maintenance, utilities, repairs, and insurance but before deducting any costs associated with financing and before deducting federal income taxes. It is similar to EBITDA in a financial reporting context.
Net regulatory burden
The private costs of regulation less the private benefits of regulation.
Neural networks
Highly flexible machine learning algorithms that have been successfully applied to a variety of supervised and unsupervised tasks characterized by non-linearities and interactions among features
Off-the-run
A series of securities or indexes that were issued/created prior to the most recently issued/created series
On-the-run
The most recently issued/created series of securities or indexes
Option-adjusted spread
(OAS) Constant spread that, when added to all the one-period forward rates on the interest rate tree, makes the arbitrage-free value of the bond equal to its market price
Other comprehensive income
Changes to equity that bypass (are not reported in) the income statement; the difference between comprehensive income and net income
Overfitting
When a model fits the training data too well and so does not generalize well to new data.
Out-of-sample forecast errors
The differences between actual and predicted values of time series outside the sample period used to fit the model.
Overnight indexed swap (OIS) rate
An interest rate swap in which the periodic floating rate of the swap equals the geometric average of a daily unsecured overnight rate (or overnight index rate).
Parametric method
A method of estimating VaR that uses the historical mean, standard deviation, and correlation of security price movements to estimate the portfolio VaR. Generally assumes a normal distribution but can be adapted to non-normal distributions with the addition of skewness and kurtosis. Sometimes called the varianceovariance method or the analytical method.
Pecking order theory
The theory that managers consider how their actions might be interpreted by outsiders and thus order their preferences for various forms of corporate financing. Forms of financing that are least visible to outsiders (e.g., internally generated funds) are most preferable to managers and those that are most visible (e.g., equity) are least preferable.
PEG ratio
The P/E-to-growth ratio, calculated as the stock P/E divided by the expected earnings growth rate.
Poison pill
A pre-offer takeover defense mechanism that makes it prohibitively costly for an acquirer to take control of a target without the prior approval of the target board of directors.
Poison puts
A pre-offer takeover defense mechanism that gives target company bondholders the right to sell their bonds back to the target at a pre-specified redemption price, typically at or above par value; this defense increases the need for cash and raises the cost of the acquisition
Positive serial correlation
Serial correlation in which a positive error for one observation increases the chance of a positive error for another observation; a negative error for one observation increases the chance of a negative error for another observation
Potential GDP
The maximum amount of output an economy can sustainably produce without inducing an increase in the inflation rate. The output level that corresponds to full employment with consistent wage and price expectations.
Precision
In error analysis for classification problems it is ratio of correctly predicted positive classes to all predicted positive classes. Precision is useful in situations where the cost of false positives (FP), or Type I error, is high.
Preferred habitat theory
A term structure theory that contends that investors have maturity preferences and require yield incentives before they will buy bonds outside of their preferred maturities
Present value of growth opportunities
The difference between the actual value per share and the no-growth value per share. Also called value of growth
Proxy fight
An attempt to take control of a company through a shareholder vote.
Purchasing power parity (PPP)
The idea that exchange rates move to equalize the purchasing power of different currencies
Pure expectations theory
A term structure theory that contends the forward rate is an unbiased predictor of the future spot rate. Also called the unbiased expectations theory .
Putable bond
Bond that includes an embedded put option, which gives the bondholder the right to put back the bonds to the issuer prior to maturity, typically when interest rates have risen and higher-yielding bonds are available
Qualitative dependent variables
Dummy variables used as dependent variables rather than as independent variables.
Random walk
A time series in which the value of the series in one period is the value of the series in the previous period plus an unpredictable random error.
Real estate investment trusts
Tax-advantaged entities (companies or trusts) that own, operate, ando a limited extent develop income-producing real estate property
Real options
Options that relate to investment decisions such as the option to time the start of a project, the option to adjust its scale, or the option to abandon a project that has begun
Redemption basket
The list of securities (and share amounts) the authorized participant (AP) receives when it redeems ETF shares back to the ETF manager. The redemption basket is published each business day.
Regulatory burden
The costs of regulation for the regulated entity.
Regulatory capture
Theory that regulation often arises to enhance the interests of the regulated.
Regulatory competition
Regulators may compete to provide a regulatory environment designed to attract certain entities.
Reinforcement learning
Machine learning in which a computer learns from interacting with itself or data generated by the same algorithm
Relative VaR
Ex ante tracking error. A measure of the degree to which the performance of a given investment portfolio might be expected to deviate from its benchmark; also known as relative VaR.
Relative version of PPP
The hypothesis that changes in (nominal) exchange rates over time are equal to national inflation rate differentials.
Repeat sales index
As the name implies, this type of index relies on repeat sales of the same property. In general, the idea supporting this type of index is that because it is the same property that sold twice, the change in value between the two sale dates indicates how market conditions have changed over time
Residual
The difference between an observation and its predicted value, where the predicted value is based on the estimated linear relation between the dependent and independent variables using sample data.
Residual income
Earnings for a given period, minus a deduction for common shareholdersopportunity cost in generating the earnings. Also called economic profit or abnormal earnings
Residual income model
(RIM) A model of stock valuation that views intrinsic value of stock as the sum of book value per share plus the present value of the stock expected future residual income per share. Also called discounted abnormal earnings model
Residual loss
Agency costs that are incurred despite adequate monitoring and bonding of management
Return on capital employed
Operating profit divided by capital employed (debt and equity capital).
Return on invested capital
A measure of the after-tax profitability of the capital invested by the company shareholders and debtholders
Rho
The change in a given derivative instrument for a given small change in the risk-free interest rate, holding everything else constant. Rho measures the sensitivity of the option to the risk-free interest rate
Roll
When an investor moves its investment position from an older series to the most current series
Roll return
The component of the return on a commodity futures contract attributable to rolling long futures positions forward through time. Also called roll yield
Rolling down the yield curve
A maturity trading strategy that involves buying bonds with a maturity longer than the intended investment horizon. Also called riding the yield curve
Root mean squared error (RMSE)
The square root of the average squared forecast error; used to compare the out-of-sample forecasting performance of forecasting models.
Secured overnight financing rate (SOFR)
A daily volume-weighted index of rates on qualified cash borrowings collateralized by US Treasuries that is expected to replace Libor as a floating reference rate for swaps
Segmented markets theory
A term structure theory that contends yields are solely a function of the supply and demand for funds of a particular maturity.
Self-regulating organizations (SROs)
Self-regulating bodies that are given recognition and authority, including enforcement power, by a government body or agency
Service period
For employee stock options, usually the period between the grant date and the vesting date
Settled in arrears
An arrangement in which the interest payment is made (i.e., settlement occurs) at the maturity of the underlying instrument
Sinking fund bond
A bond that requires the issuer to set aside funds over time to retire the bond issue, thus reducing credit risk.
Split-rate tax system
In reference to corporate taxes, a split-rate system taxes earnings to be distributed as dividends at a different rate than earnings to be retained. Corporate profits distributed as dividends are taxed at a lower rate than those retained in the business.
Stabilized NOI
In the context of real estate, the expected NOI when a renovation is complete
Stable dividend policy
A policy in which regular dividends are paid that reflect long-run expected earnings. In contrast to a constant dividend payout ratio policy, a stable dividend policy does not reflect short-term volatility in earnings
Standard error of the forecast
A measure of the uncertainty associated with a forecasted value of the dependent variable that depends on the standard error of the estimate, the variability of the independent variable, the deviation of the forecasted independent variable from the mean in the regression, and the number of observations
Standardized beta
With reference to fundamental factor models, the value of the attribute for an asset minus the average value of the attribute across all stocks, divided by the standard deviation of the attribute across all stocks
Static trade-off theory of capital structure
A theory pertaining to a company optimal capital structure. The optimal level of debt is found at the point where additional debt would cause the costs of financial distress to increase by a greater amount than the benefit of the additional tax shield
Statutory merger
A merger in which one company ceases to exist as an identifiable entity and all its assets and liabilities become part of a purchasing company
Sum of squares error (SSE)
The sum of the squared deviations of (1) the value of the dependent variable and (2) the value of the dependent variable based on the estimated regression line. Also referred to as the residual sum of squares
Sum of squares regression (SSR)
The sum of the squared deviations of (1) the value of the dependent variable based on the estimated regression line and (2) the mean of the dependent variable
Sum of squares total (SST)
The sum of the squared deviations of the dependent variable from its mean; the variation of the dependent variable. Also referred to as the total sum of squares.
Swap rate
The price that swap traders quote among one another. It is the rate at which the present value of all the expected floating-rate payments received over the life of the floating-rate
bond equal the present value of all the expected fixed-rate payments made over the life of the fixed-rate bond
Systematic risk
Risk that affects the entire market or economy; it cannot be avoided and is inherent in the overall market. Systematic risk is also known as non-diversifiable or market risk.
Target payout ratio
A strategic corporate goal representing the long-term proportion of earnings that the company intends to distribute to shareholders as dividends.
TED spread
A measure of perceived credit risk determined as the difference between Libor and the T-bill yield of matching maturity
Temporal method
A variation of the monetary/non-monetary translation method that requires not only monetary assets and liabilities, but also non-monetary assets and liabilities that are measured at their current value on the balance sheet date to be translated at the current exchange rate. Assets and liabilities are translated at rates consistent with the timing of their measurement value. This method is typically used when the functional currency is other than the local currency.
Tender offer
A public offer whereby the acquirer invites target shareholders to submit (tender) their shares in return for the proposed payment
Theta
The change in a derivative instrument for a given small change in calendar time, holding everything else constant. Specifically, the theta calculation assumes nothing changes except calendar time. Theta also reflects the rate at which an option time value decays
Tokenization
The process of splitting a given text into separate tokens. Tokenization can be performed at the word or character level but is most commonly performed at word level.
Total factor productivity (TFP)
A multiplicative scale factor that reflects the general level of productivity or technology in the economy. Changes in total factor productivity generate proportional changes in output for any input combination.
Tracking error
The standard deviation of the differences between a portfolio returns and its benchmarkÕs returns; a synonym of active risk. Also called tracking risk
Trimming
Also called truncation, it is the process of removing extreme values and outliers from a dataset
Two-tier board
Board structure consisting of a supervisory board that oversees a management board.
Unconditional heteroskedasticity
Heteroskedasticity of the error term that is not correlated with the values of the independent variable(s) in the regression.
Underlying earnings
Earnings excluding nonrecurring components. Also referred to as continuing earnings, core earnings , or persistent earnings
Unit root
A time series that is not covariance stationary is said to have a unit root
Unsupervised learning
Machine learning that does not make use of labeled data.
Value at risk (VaR)
The minimum loss that would be expected a certain percentage of the time over a certain period of time given the assumed market conditions
Vega
The change in a given derivative instrument for a given small change in volatility, holding everything else constant. A sensitivity measure for options that reflects the effect of
volatility
White-corrected standard errors
A synonym for robust standard errors
White knight
A third party that is sought out by the target company board to purchase the target in lieu of a hostile bidder
White squire
A third party that is sought out by the target company board to purchase a substantial minority stake in the targetÑenough to block a hostile takeover without selling the entire company.
Winner curse
The tendency for the winner in certain competitive bidding situations to overpay, whether because of overestimation of intrinsic value, emotion, or information asymmetries.
Winsorization
The process of replacing extreme values and outliers in a dataset with the maximum (for large value outliers) and minimum (for small value outliers) values of data points that are not outliers
Zero-coupon bond
A bond that does not pay a coupon but is priced at a discount and pays its full face value at maturity.
