Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
453 Cards in this Set
- Front
- Back
|
A priori probability
|
A probability based on logical analysis rather than observation or personal judgement
|
|
|
abandonment option
|
ability to terminate project at some future time if financial results disappointing
|
|
|
abnormal rate of return
|
under/overperform form E(R)
|
|
|
above full-time equilibrium
|
real GDP exceeds potential GDP
|
|
|
absolute dispersion
|
amount of variability present without comparison to benchmark
|
|
|
absolute frequency
|
# of observations in given interval
|
|
|
account format
|
T-account
|
|
|
accounting profit
|
income before taxes/pretax income
|
|
|
accounting risk
|
risk of country variation of accounting standards
|
|
|
AR turnover
|
sales on credit/avg balance of AR
|
|
|
accrual accounting
|
method which effect transactions when occur, not necessarily settled in cash
|
|
|
accrued expenses
|
aka accrued liability
expenses incurred but not yet paid i.e. rent payable |
|
|
accrued interest
|
interest earned but not yet paid
|
|
|
accumulated benefit obligation
|
US GAAP - measure of estimating DB plans liability
pv of benefits |
|
|
accumulated depreciation
|
offset PPE
contra asset account reflects amount of cost allocated to current and previous period |
|
|
acquisition method
|
acquirer is required to measure each identifiable asset at fair value
convergence of IASB and FASB |
|
|
active return
|
return on portfolio - return on benchmark
alpha |
|
|
active (squared)
|
SD of active returns
(variance of active returns) |
|
|
active strategy
|
cash mgmt technique - capitlize market conditions to optimize short term investments
|
|
|
addition rule of prob.
|
Prob that A or B occurs = prob A occurs + prob B occurs - prob. that both A and B occur
|
|
|
add-on interest
|
procedure for determining interst on bond/loan in which interest added on to face value of contract
|
|
|
adjusted beta
|
historical beta adjusted to reflect tendency of mean reverting beta
|
|
|
adjusted R-squared
|
goodness of fit of regression adjusted for Df
does not automatically increase when 1 more independent variable added |
|
|
agency costs
|
costs associated with conflict between managers and shareholders
|
|
|
aggregate demand
|
relationship between quantity of real GDP demanded and price level
|
|
|
allowance for bad debts
|
asset - offset to AR for estimated uncollectable
|
|
|
amortization
|
allocating cost of intangible to useful life
ie - patent or bond int. amortization |
|
|
analysis of variance (anova)
|
analysis of total variability of dataset into components representing different sources of variation
regression: F-test |
|
|
APR
|
cost of borrowing expressed as yearly rate
|
|
|
anticipation stock
|
excess INVENTORY in anticipation for high demand
|
|
|
anti-dilutive
|
security that would increase EPS, or result in higher EPS than basic EPS
note: not included in diluted EPS calculation |
|
|
arithmetic mean
|
sum of observations divided by number of observations
|
|
|
arrears swap
|
type of interest rate swap in which floating payment is SET AT END OF PERIOD, and interest paid at same time
|
|
|
Asian call option
|
european-style call - uses average stock price
|
|
|
asset beta
|
unlevered beta
reflects BUSINESS RISK not equity beta asset's systematic risk |
|
|
asset retirement obligation (ARO)
|
fair value of estimated costs of tangible asset's life
|
|
|
assignment of AR
|
use AR as collateral for loan
|
|
|
autocorrelation test
|
test of EMH
compares price changes over time to check for predictable correlation patterns |
|
|
automated clearinghouse
|
electronic payment network in US and Canada
|
|
|
automatic fiscal policy
|
fiscal policy action triggered by state of economy
|
|
|
automatic stabilizers
|
mechanisms that stabilize real GDP without action by government
|
|
|
autonomous tax multiplier
|
magnification effect of change in taxes on aggregate demand
works like increase in govt expenditure, but magnitude of tax mulltiplier LESS than government expenditure multiplier |
|
|
autoregressive model
|
time series of regressed on its own past values
independent variable is lagged value of dependent variable |
|
|
Available for sale investments
|
reported at fair/market value on balance sheet
|
|
|
backward integration
|
ex: buying supplier
|
|
|
backwardation
|
futures markets where futures price less than spot price
|
|
|
balanced budget
|
government budget in which tax revenues and expenses equal
|
|
|
b/s based aggregate accruals
|
difference between net operating assets at end period and beg of period
|
|
|
bank discount basis
|
quoting convention that annualizes, 360 day year, the discount as percentage of face value
|
|
|
basic eps
|
net earnings available to common shareholders (NI-preferred div) divided by wtd avg shares outstanding
|
|
|
basis
|
difference between spot price of underlying asset and futures contract price at any point in time
|
|
|
basis point value
|
aka PV of basis point (PVBP)
change in bond price for 1 basis point change in yield |
|
|
basis swap
|
swap in which both parties pay floating
|
|
|
Bayes formula
|
method for updating probabilities based on new info
|
|
|
bear hug
|
strategy used by acquirers to circumvent target's management and goes directly to BOD
|
|
|
bear spread
|
options strategy: selling put w/ lower strike and buying put w/ higher strike
note: can use calls also |
|
|
below full-employment equilibrium
|
potential GDP > real GDP
|
|
|
Bernoulli random variable
|
random variable with outcomes 0 and 1 only
binomial outcome |
|
|
bilateral monopoly
|
single seller (monopoly) faces single buyer (monopsony)
|
|
|
binomial random variable
|
# of successes in N trials for which prob of success constant for all trials
trials are independent |
|
|
black market
|
illegal market where price exceeds set ceiling
|
|
|
bond equivalent yield
|
calculation that is annualized using 365 to # of days to maturity
allows for easier comparison of securities with different compounding periods |
|
|
bond yield plus risk premium approach
|
estimate of cost of equity
produced by summing pre-tax cost of debt and risk premium that captures additional yield on company stock relative to bonds note: additional yield on company stock often estimated by historical spreads between bond yields and stock yields |
|
|
bond-equivalent basis
|
basis for stating an annual yield that annualizes a semiannual yield by doubling it
|
|
|
bond-equivalent yield
|
YTM on basis that ignores compounding
|
|
|
book value equity per share
|
amount of book value (carrying value) of shareholder equity/# of shares outstanding
|
|
|
bookstrapping earnings
|
increase in company's earnings that result from non-synergistic merger
|
|
|
bottom-up
|
selection from all securities within specified universe
note: without prior narrowing of universe (no consideration of macroeconomic/market conditions) |
|
|
box spread
|
options strategy combines bull spread and bear spread with 2 strikes
produces Rf payoff of difference in strike prices |
|
|
break point (WACC)
|
amount of capital at which cost of one or more of sources capital changes - leads to change in WACC
|
|
|
budget deficit
|
govt's budget balance that is negative: costs (outlay) exceeds revenues
|
|
|
budget surplus
|
gov't budget balance that is positive: revenues exceeds costs
|
|
|
bull spread
|
option strategy: buying call w/ lower strike, selling call with higher strike
|
|
|
butterfly spread
|
option strategy combines 2 bull or bear spreads
note: has 3 strikes |
|
|
call
|
option that gives buyer right to buy and seller obligation to sell
|
|
|
cap
|
contract on interest rates where writer of cap pays difference (if positive) between market and specified.
note: equivalent to stream of call options on interest rate 2) interest rate call option to hedge borrower against high rate note: caplet: each component call option in a cap |
|
|
CAPM
|
E(R) on asset as linear function of beta and market portfolio
|
|
|
capital market line
|
intercept is at Rf rate
represents efficient frontier when Rf asset is available for investment |
|
|
capitalized costs
|
includes cost of purchase, cost of conversion, cost to bring to location and condition, and allocated portion of fixed production overhead costs
|
|
|
carrying/book value
|
amount at which asset/liability is valued according to accounting standard
|
|
|
cash conversion cycle
|
aka net operating cycle
measures length of time required for company to convert cash invested to cash received days of inventory on hand + days of sales outstanding - # of days of payables |
|
|
central bank
|
bank's bank
public authority that regulates nation's depository institutions and controls quantity of money |
|
|
central limit theorem
|
sample mean from computed from larger sample from population follows approximate normal distribution
note: sample mean = population mean sample variance = population variance |
|
|
characteristic line
|
regression line that indicates systematic risk (beta) of risky asset
|
|
|
cheapest to deliver
|
price of delivering bond is larger than market price of same bond
|
|
|
Classical theory
|
macroeconomist who believes economy is self-regulating and it is always at full-employment
|
|
|
clearinghouse
|
entity in a futures market where act as middleman and guarantees performance
|
|
|
coefficient of variation (CV)
|
ratio of SD to mean
|
|
|
collar
|
options strategy: buy put and sell call
get protection below put strike and gives up potential above call strike |
|
|
combination (opposite permutation)
|
order DOES NOT MATTER
|
|
|
commercial paper
|
UNSECURED short-term paper
note: single payment at maturity, no secondary market |
|
|
common-size cash flow
|
1) express line item as percentage of total flows of cash
2) express line item as percentage of net revenue |
|
|
complement (statistics)
|
the event that S does NOT occur
|
|
|
completed contract method
|
does not recognize revenue until project completed
note: usually used for long-term projects |
|
|
consolidation
|
combining results of operations of subsidiaries as if one unit.
eliminates intercompany transactions |
|
|
constant maturity treasury
|
hypothetical treasury note w/ constant maturity (2-10 years)
|
|
|
constant returns to scale
|
firm's technology component that lead to constant long-run avg cost (even as output increases)
note: horizontal LRAC curve |
|
|
price-weighted index
|
ex: DJIA
price-based, most expensive stocks have more influence note: also adjusted for stock splits |
|
|
value-weighted index
|
ex: S&P
highest market cap most influence |
|
|
contango
|
futures price higher than spot
|
|
|
contestable market
|
no barriers to entry, easy in and out
|
|
|
continuously compounded return
|
natural log of 1 plus holding period of return
or, natural log of ending price/beginning price |
|
|
contribution margin
|
amount left over for fixed costs
revenue - variable costs |
|
|
convenience yield
|
intangible return by asset when in short supply (seasonal production)
|
|
|
core inflation rate
|
CPI - food and fuel
|
|
|
corporate raider
|
to acquire company and reselt
i.e. to profit from takeover itself |
|
|
cost of capital
|
rate of return required for suppliers of capital.
compensation for capital contribution |
|
|
cost recovery method
|
revenue recognition
seller does not report any PROFIT, until cash received greater than seller's cost |
|
|
cost-push inflation
|
inflation that results in initial increase in price
|
|
|
covariance
|
measure of movement between two securities
|
|
|
covered call
|
buy stock and sell call
|
|
|
covered interest rate arbitrage
|
executed in foreign exchange market
currency bought/sold and forward contract sold/bought to lock in exchange rate note: should earn Rf rate of investor's HOME country |
|
|
credit-linked notes
|
fixed income security where holder has right to withhold payment of full amount if credit event occurs
|
|
|
cross elasticity of demand
|
responsiveness to a change in price of substitute or compliment.
percentage change in quantity demanded/percentage change in price |
|
|
cross-sectional analysis
|
involves comparisons across group over given time period
|
|
|
crowding out effect
|
tendency for budget deficit to decrease investment
|
|
|
cumulative distribution function (cdf)
|
prob that random variable less than or equal to specified value.
finds prob of range of values, not a specific outcome |
|
|
cumulative relative frequency
|
relative to intervals
fraction of total observation less than value of upper limit of stated interval |
|
|
cyclical stock
|
high beta: higher than market during up-cycle, vice-versa
|
|
|
deadweight loss
|
measure of inefficiency
equal to decrease in total surplus that results from inefficient level of production |
|
|
debt-rating approach
|
uses pre-tax cost of debt
based on yield of comparable companies |
|
|
decile
|
quantiles that divide distribution into 10 equal parts
|
|
|
defensive interval ratio
|
liquidity ratio: estimates # of days that entity could meet cash needs from liquid assets
|
|
|
deferred tax assets
|
excess amount paid for income taxes relative to accounting profit
Key: taxable (taxing authority) income higher than accounting profit |
|
|
deferred tax liability
|
not enough paid for income taxes relative to accounting profit
Key: taxable (taxing authority) income less than accounting profit |
|
|
degree of confidence
|
probability that confidence interval includes unknown population parameter
|
|
|
degree of financial leverage (DFL)
|
sensitivity of cash flows available to owners/shareholders when operating income changes
|
|
|
degree of operating leverage (DOL)
|
sensitivity of operating income to changes in units sold
|
|
|
degree of total leverage
|
sensitivity of cash flows to owners to changes in # of units produced and sold
|
|
|
degree of freedom (df)
|
# of independent observations used
|
|
|
delivery
|
process (in forwards) where long pays promised amount to short, and short delivers asset to long
|
|
|
delta
|
relationship between option price and sensitivity to underlying stock price
|
|
|
delta hedge
|
option strategy: Rf position converts with # of options
|
|
|
delta-normal method
|
use of delta to estimate option's sensitivity
|
|
|
demand-pull inflation
|
inflation that results from initial increase in aggregate demand
|
|
|
diff swaps
|
swap which payments are made in interest rates in 2 countries, but payments only made in single currency
|
|
|
direct finance lease
|
from lessor perspective: PV of lease payments (lease receivable) equals carrying value of leased assets
|
|
|
direct format (CF statement)
|
CFO shown as operating cash receipts less operating cash disbursements
|
|
|
direct write-off method
|
company writes off uncollectible when incurs
|
|
|
dirty items
|
adjustments to shareholder equity that bypass income statment
|
|
|
discount interest procedure
|
determines procedure on loan/bond which interest is deducted from face value in advance
|
|
|
discount rate (Fed)
|
interest rate in which Fed stands ready to loan reserves to banks
|
|
|
discrete random variable
|
countable number
|
|
|
discretionary fiscal policy
|
fiscal action that is initiated by Congress
|
|
|
diseconomies of scale
|
rising long-run average cost curve as outputs increase
|
|
|
dividend discount model approach (country risk analysis)
|
estimates country's equity risk premium.
market rate of return estimated as sum of dividends in market note: subtracting Rf from market return - estimate for equity risk premium |
|
|
dominant strategy equilibrium
|
best strategy for each player is to cheat and deny, regardless of strategy of other player
|
|
|
duration
|
measure of option-free bond's average maturity
measure of bond's sensitivity to interest rates movements |
|
|
dynamic hedging
|
strategy which a position is hedged by making frequent adjustments to hedged investment
|
|
|
earnings multiplier model
|
technique for estimating price of stock as multiple of futures EPS
|
|
|
economic (exchange rate) exposure
|
risk with changes in attractiveness arising out of changes in exchange rates
|
|
|
economic value add (EVA)
|
same as estimating profit, but makes changes in doubtful items in financial statements
|
|
|
economic rent
|
any surplus (consumer surplus, producer surplus or economic profit)
|
|
|
effective annual rate
|
amount by which unit of currency grows in a year with interest on interest included
|
|
|
efficiency wage
|
real wage rate set above equilibrium wage rate: balances the costs and benefits of higher wage rate to maximize firm's profit
|
|
|
efficient frontier
|
portion of minimum-variance frontier
set of portfolios with maximum return for level of risk |
|
|
elastic demand
|
demand with price elasticity GREATER than 1.
% change in quantity demanded > (exceeds) % change in price |
|
|
empirical probability
|
prob of event estimated as relative frequency of occurrence
based on demonstrable evidence |
|
|
enterprise risk management
|
form of CENTRALIZED risk management
manages broad variety of risk |
|
|
equitizing cash
|
strategy used to replicate index
also used to buy equity position while maintaining liquidity |
|
|
equity carve-out
|
form of restructuring involving creating a new legal entity and the sale of equity inside it to outsiders
|
|
|
equity method
|
reporting investment income as recognizing share of INCOME, not as dividends received.
|
|
|
equity risk premium
|
E(r) on equities - Rf rate
also: premium investors demand for investing in equities |
|
|
error term
|
portion of dependent variable not explained by independent variable in regression
|
|
|
estimated (fitted) parameters
|
regression analysis: estimated values of 1) population intercept 2) population slope coefficient in a regression
|
|
|
Eurodollar
|
deposits in USD denominated outside US
|
|
|
excess kurtosis
|
degree of peakness (fatness of tails) compared to normal distribution
|
|
|
exchange for physicals (EFP)
|
delivery procedure in futures markets where long and short arrange settlement outside normal procedures
|
|
|
exchange ratio
|
# of shares target company will receive due to merger/acquistion
|
|
|
ex-dividend
|
shares that no longer carry right to next dividend pmt
|
|
|
external efficiency
|
prices adjust quickly to new info regarding supply/demand
aka informational efficiency |
|
|
external growth
|
growth in sales by buying necessary resources
ex. m&a |
|
|
factor risk premium (factor price)
|
expected return in excess of Rf
sensitivity of 1 to one factor and 0 to all other factors |
|
|
fair market value
|
market price of asset/liability that trades regularly
|
|
|
federal budget
|
annual statement of expenses and tax revenues of US govt
includes law and regulations that approve and support statement |
|
|
fed fund rate
|
interest rate that banks charge each other on o/n loans
|
|
|
Federal Open Market Committee
|
Main policy-making organ of Federal Reserve System
|
|
|
Federal Reserve System (The Fed)
|
The central bank of US
|
|
|
fiduciary call
|
European call + Rf bond with same maturity and face value = strike price of call
|
|
|
capital lease (finance lease)
|
rules if ANY met:
title of leased asset xfered to lessee at end of lease period can have option to purchase leased asset at significantly lower prices than fmv lease period is 75% or more of asset's economic life PV of lease payments is 90% or more of fair value of leased asset |
|
|
financial futures
|
futures contracts which underlying is stock, bond or currency (not interest rates)
|
|
|
fiscal imbalance
|
PV of commitments to pay benefits - PV of tax revenues
|
|
|
fiscal policy
|
government's attempt to achieve macroeconomic stability: NIFEG, price level stability by setting and changing tax rates, making transfer payments (largest item of outlay), purchasing goods and services
|
|
|
float
|
amount of money in transit from customers but not yet available for company to use
|
|
|
floor
|
equivalent to a combination of interest rate put options designed to hedge lender against lower rates on floating loan
floorlet: each component put option on floor |
|
|
floor traders/locals
|
market makers that establish bid/ask
primary providers of liquidity in market |
|
|
floatation cost
|
fees charged by banks for raising capital
|
|
|
forward integration
|
merger involving buying entity farther along value chain
ex: buying out distributor |
|
|
forward rate agreement (FRA)
|
forward contract to borrow/lend money at rate at some future date
settled in cash no actual loan is made at settlement, only at end of INTEREST RATE PERIOD |
|
|
four-firm concentration measure/ratio
|
measure of market power calculated as percentage of sales by 4 largest firms in industry
|
|
|
free cash flow
|
cash available to investors after making investments necessary to maintain company as ongoing enterprise.
funds available for shareholders and bondholders without impairing company |
|
|
frictional employment
|
unemployment in normal labor turnover
|
|
|
full employment
|
quantity of labor demanded = quantity of labor supplied
no cyclical unemployment, only frictional and structural |
|
|
full-employment equilibrium
|
real GDP = potential GDP
|
|
|
functional currency
|
currency of primary country where company operates
|
|
|
fundamental beta
|
beta based on fundamental of company
|
|
|
futures commission merchants (FCM)
|
companies/individuals that execute futures transactions off exchange
|
|
|
required rate on security
|
nominal Rf + default risk premium + liquidity premium + maturity risk premium
|
|
|
problems with IRR
|
For mutually exclusive projects, NPV = IRR when initial costs are different sizes and timing of cash flow
|
|
|
mutually exclusive
|
only one can be accepted
|
|
|
NPV rule
|
when IRR and NPV conflicts, go with higher NPV
|
|
|
holding period return
|
arithmetic return
|
|
|
money-weighted return
|
IRR on a portfolio (same calculation of IRR on calculator)
|
|
|
time-weighted return
|
measures compound growth
geometric return formula note: preferred method because not affected by timing of CF |
|
|
inferential statistics
|
used to make forecasts, estimates
|
|
|
types of measurement scales
|
1) Nominal - lease accurate, no particular order
2) ordinal - every observation assigned to a category 3) interval - relative ranking 4) ratio - provide ranking and have true zero point as origin note: NOIR |
|
|
mean absolute deviation (MAD)
|
average, absolute value of observation deviation from mean
note: SD>MAD |
|
|
Sharpe ratio
|
measures excess return per unit of risk
|
|
|
subjective probability
|
use of personal judgement (least formal method)
|
|
|
multiplication rule of prob.
|
determine both A and B will happen
|
|
|
total probability rule
|
determines unconditional probability given conditional probabilities
|
|
|
permutation
|
order IS IMPORTANT
|
|
|
continuous random variable
|
# of possible outcomes infinite
|
|
|
probability density function
|
f(x), used to generate prob that outcomes of a continuous distribution lie within particular range of outcomes
equivalent to probability function for discrete distribution |
|
|
discrete uniform random variable
|
prob for all possible outcomes are equal
|
|
|
expected value of binomial random variable
|
expected value of X = E(X) np
n - number of trials p - probability of success for each trial |
|
|
continuous uniform distribution
|
range that spans between a lower limit and upper limit
|
|
|
prob of uniform distribution formula
|
x2-x1 / b - a
|
|
|
normal distribution
|
skewness = 0
kurtosis = 3 |
|
|
confidence intervals
|
90% = X+- 1.65s
95% = +- 1.96s 99% = +- 2.58s |
|
|
SD of confidence intervals
|
1 SD = 68% confidence
2 SD = 95% 3 SD = 99% |
|
|
standard normal distribution
Z - table |
mean = 0
SD = 1 |
|
|
Roy's safety first criterion
|
optimal portfolio minimizes probability that return wont fall below certain "threshold"
|
|
|
lognormal distribution
|
skewed to right (positive skewed)
bounded from below by 0 (lower limit) |
|
|
Monte Carlo Simulation
|
repeated generation of risk factors
it is a risk factoring model calculates VaR to determine risk of portfolio value portfolios that have non-normal distributions |
|
|
sampling error
|
difference between sample statistic and population parameter
sample error = sample mean - population mean |
|
|
stratified random sampling
|
classification system to separate population into smaller groups
note: used in bond indexing |
|
|
time series data vs cross-sectional data
|
time series = any point in time
cross-sectional = at a single point in time |
|
|
properties of central limit theorem
|
if n>30, distribution will be approx. normal
mean of population = mean of sample = 0 |
|
|
point estimates vs. confidence intervals
|
confidence intervals are constructed from point estimate
point estimate +- (reliability factor x standard error) |
|
|
desirable properties of estimator
|
unbiased, efficient, consistent
|
|
|
**criteria for selecting appropriate test statistic
|
normal distribution with known population variance = z
normal distribution with unknown population variance = t nonnormal distribution with known population variance = (large sample n>30 only) z-state nonnormal distribution with unknown population variance (only for large sample) t- stat |
|
|
desirable properties of estimator
|
unbiased, efficient, consistent
|
|
|
sampling biases
|
data mining - repeatedly use same date base until something works (over-estimates)
sample selection - some data systematically excluded survivorship - only use observations that exist (most common form) look-ahead - when test using sample data was not available time-period - period too long/short |
|
|
**criteria for selecting appropriate test statistic
|
normal distribution with known population variance = z
normal distribution with unknown population variance = t nonnormal distribution with known population variance = (large sample n>30 only) z-state nonnormal distribution with unknown population variance (only for large sample) t- stat |
|
|
steps to hypothesis testing
|
1) state hypothesis
2) select test statistic (z, t, chi-square, F) 3) specify level of significance 4) state decision rule 5) calculate sample statistic 6) make decision |
|
|
sampling biases
|
data mining - repeatedly use same date base until something works (over-estimates)
sample selection - some data systematically excluded survivorship - only use observations that exist (most common form) look-ahead - when test using sample data was not available time-period - period too long/short |
|
|
null hypothesis
|
hypothesis that researcher wants to reject
note: will always include "equal to" sign |
|
|
steps to hypothesis testing
|
1) state hypothesis
2) select test statistic (z, t, chi-square, F) 3) specify level of significance 4) state decision rule 5) calculate sample statistic 6) make decision |
|
|
type 1 error
|
rejecting null when in fact true
|
|
|
null hypothesis
|
hypothesis that researcher wants to reject
note: will always include "equal to" sign |
|
|
type 2 error
|
accepting null when false
|
|
|
type 1 error
|
rejecting null when in fact true
|
|
|
significance level
|
probability of making type 1 error (alpha)
|
|
|
type 2 error
|
accepting null when false
|
|
|
power of test
|
1-p(type II error)
|
|
|
significance level
|
probability of making type 1 error (alpha)
|
|
|
paired comparison test
|
hypothesis test to see if mean of two normally distributed populations are equal (or not)
|
|
|
power of test
|
1-p(type II error)
|
|
|
paired comparison test
|
hypothesis test to see if mean of two normally distributed populations are equal (or not)
|
|
|
chi-squared test
|
hypothesis test to see if 2 variances are equal
note: asymmetrical and approaches normal distribution as df increases |
|
|
F-test
|
to test if 2 independent variances are equal
|
|
|
contrarian opinion rules (6)
|
cash positions in mutual funds (mutual fund ratio high, bullish)
investor credit balances (if low, bearish) Opinions of investment advisory services OTC vs. NYSE volume (if otc volume increase, bearish) CBOE put/call ratio (higher puts, bullish) stock index futures |
|
|
Smart money rules (3)
|
Confidence index (quality bonds/avg bond yields) - if quality bond yields fall, bullish
T-bill-eurodollar yield spread - higher spread (more people going to T-bills), bearish Margin debt - increase (margin buying), bullish |
|
|
economic depreciation
|
decrease in value of asset due to using asset to produce product
|
|
|
economic profit
|
economic profit - revenue - explicit cost - implicit costs
economic profit = 0 when firms revenue equals opportunity costs (implicit, explicit, normal profit) |
|
|
game theory
|
tool for studying strategic behavior
takes into account expected behavior of others and recognize mutual interdependence |
|
|
Nash equilibrium
|
player A takes best possible action given actin of player B
B takes best action given action of A |
|
|
prisoner's dilemma
|
similar to oligopoly
each player knows that if he cheats, both wins if both confess, both have bad outcomes - dillemma same as oligopoly because of price-fixing game |
|
|
generational imbalance
|
fiscal imbalance between current and future generations
assumes current generations enjoys existing levels of taxes/benefits |
|
|
government debt
|
total amount govt borrowed
= sum of past budget deficits - sum of past budget surplus |
|
|
greenmail
|
purchase of accumulated shares of hostile investor - so can have control - usually done at substantial premium
|
|
|
harmonic mean
|
wtd mean
averages of reciprocals of observations, then taking reciprocal that average |
|
|
held for trading securities/trading securities
|
intention to sell in near term
gain/loss reflected in b/s + held at FV |
|
|
held to maturity
|
intends to hold until maturity
held at original cost, updated for amortization of premium/discount |
|
|
HH Index
|
market concentration measure
- summing the squared % of market shares for competing companies in an industry High: more likely to be monopoly Low: perfect competition |
|
|
4-firm concentration ratio
|
% of value of sales by 4 largest firms in industry
High (100%): monopoly Low: (0)%: perfect competition |
|
|
heteroskedasticity
|
having variance that differs across observations
vs. homoskedasticity: same variance |
|
|
histogram
|
bar chart grouped into frequency distribution
|
|
|
historical cost
|
assets: purchase price + acquisition/prepration
liabilities: proceeds received by issuing debt |
|
|
historical equity risk premium approach
|
estimate of country risk premium
based on historical averages of Rf rates + rate of return on market |
|
|
historical method, historical simulation
|
way of estimating VaR
|
|
|
holder-of-record date
|
shareholder listed on for upcoming dividend
2 business days after ex-dividend |
|
|
holding period return
|
same as total return
|
|
|
identifiable intangible/unidentifiable intangible
|
identifiable: has finite life
unidentifiable: has infinite life (no amortize, but subject to impairment - reduce value on b/s and on income statement) |
|
|
income tax payable
|
income tax owed under taxable income
|
|
|
induced taxes
|
taxes that vary w/ real GDP
|
|
|
inflationary gap
|
amount that which real GDP exceeds potential GDP
|
|
|
interest rate call
|
option where holder has right to make known interest payment and receive an unknown interest rate payment
underlying is unknown interest rate interest rate put: opposite reference to FRAs - but FRA is commitment, interest rate options are rights |
|
|
interest rate cap
|
series of calls
expiration is when reset of interest rate each option has same strike |
|
|
interest rate collar
|
long call/cap
short put/floor |
|
|
interest rate parity
|
parity:equivalance
equivalence of spot and forward, after adjusting for difference in interest rates |
|
|
interquartile range
|
difference between 3rd and 1st quartile
|
|
|
intrinsic value
|
value if exercised now
|
|
|
CFI
|
cash activities associated with - or + of PPE, intangible assets, LT assets
and both LT and ST securities issued by other companies |
|
|
optimal capital budget
|
investment opportunity set = marginal cost of capital
|
|
|
Keynesian
|
if economy left alone, will never operate at full potential
need help from fiscal/monetary policy |
|
|
leverage
|
use of fixed costs within company's cost structure
fixed costs that are operating costs (depreciation/rent) = operating leverage fixed costs that are financial costs (interest expense) create financial leverage |
|
|
cash settlement vs. physical delivery vs. closeout
|
cash settlement: net amount of cash exchanged
physical delivery: security is delivered closeout: mark to market gain/loss |
|
|
log-linear
|
model in which growth rate where time is held constant
|
|
|
LIBOR
|
Eurodollar rate at which London banks lend to each other
considered best gauge on dollar borrowed by high-quality borrower |
|
|
long-run (economics)
|
period of time where quantities of resources are varied
|
|
|
long-run agg supply
|
quantity of real GDP supplied = price level in long run where real GDP equals potential GDP
|
|
|
long-run avg cost curve
|
relationship between lowest attainable avg cost and output when both plant size and labor varied
|
|
|
long-run macroeconomic equilibrium
|
real GDP = potential GDP
economy is on its long-run agg supply curve |
|
|
look-ahead bias
|
bias caused by using information not available on test date
|
|
|
macroeconomic factor model
|
multifactor model
factors: surprises, which explain equity returns |
|
|
macroeconomic long-run
|
real wage rate adjusted to achieve full employment, real GDP = potential GDP, unemployment = natural rate, inflation = money growth rate - real GDP growth rate
|
|
|
macroeconomic short run
|
some prices are sticky and real GDP uncertain to potential, unemployment uncertain to natural rate
|
|
|
sticky
|
doesnt want to change
ex. short run nominal wage is sticky - fixed, doesn't want to change |
|
|
marginal cost
|
best alternative forgone
=increase in total cost/increase in output |
|
|
marginal product
|
increase in total product from one-unit increase in variable output
= increase in total product/increase in variable input |
|
|
marginal revenue product
|
change in total revenue from one more unit of labor
=increase in total revenue/increase in labor |
|
|
market price of risk
|
slope of CML
market risk premium for each additional unit of risk |
|
|
market-oriented investors
|
not value or growth investors, not clearly recognized
|
|
|
Markowitz rule
|
choose between 2 investments based on risk/return
|
|
|
characteristics of financial statements
|
understandability
comparability relevance reliability MATERIAL not part of qualitative characteristic |
|
|
McCallum rule
|
growth rate that makes monetary base that responds to LT growth rate of real GDP and medium-term changes
|
|
|
measurement scales
|
NOIR
nominal, ordinal, interval, ratio |
|
|
median
|
50th percentile
|
|
|
minimum efficient scale
|
smallest quantity of output which reaches lowest possible average cost curve
|
|
|
minority active investor
|
investments where investors exert influence, but no control
20-50% ownership |
|
|
minority interest/non-controlling interest
|
part of ownership where parent company does not own subsidiary
|
|
|
modified duration/Macaulay duration
|
measure of bond price sensitivity to interest rates
=Macaulay duration/1+YTM |
|
|
monetary base
|
sum of Fed's notes, coins, bank deposits at Fed
|
|
|
monetary policy
|
changes in interest rates and quantity of money
|
|
|
fiscal
|
practices in government seeks ideal condition through taxes, transfer payments, purchasing goods+services
|
|
|
money market yield
|
translating HPY to 360-day basis
|
|
|
money multiplier
|
change in quantity of money to change in monetary base
|
|
|
money-wtd return
|
IRR of portfolio, taking into account CFs
|
|
|
monopolistic competition
|
no good substitutes, large number of players, with slightly different products
|
|
|
moving average
|
constant recalculating of prices for period (200 days), to serve as indication of general trends in prices
|
|
|
multicollinearity
|
regression assumption violation
= 2 or more independent variables not perfectly correlated with each other |
|
|
multiple linear regression model
|
linear regression with 2 or more independent variables
|
|
|
multiple R
|
correlation between actual and forecasted values of DEPENDENT VARIABLE
|
|
|
multivariate
|
groups of random variables
|
|
|
mutually exclusive
|
only one can happen
|
|
|
natural monopoly
|
occurs when 1 firm can supply entire market at the lowest price than 2 or more firms can
|
|
|
natural unemployment rate
|
unemployment when economy is at full capacity
no cyclical: all unemployment is either frictional, structural and seasonal. |
|
|
net asset/liability b/s exposure
|
when assets/liabilities translated to current exchange rate is above/below liabilities/assets
|
|
|
net operating assets
|
difference between operating assets (assets-cash) and operating liabilities (liabilities - total debt)
|
|
|
net revenue
|
sales - uncollectables
|
|
|
New Classical economist
|
business cycle fluctuations are efficient responses of good economy, bombarded with SHOCKS AND SURPRISES that arise from neven pace of technological change
|
|
|
New Keyensian
|
money wage rate and prices of products sticky
|
|
|
non-deliverable forward (NDF)
|
always cash-settled forward contracts
used in forex forwards |
|
|
contango/backwardation
|
CURRENT futures prices higher/lower than EXPECTED futures price
|
|
|
notes payable
|
ST debt
|
|
|
# of days payables/receivables
|
# of days it takes to pay suppliers
# of days to receive funds from customers |
|
|
objective probability
|
probability that do not vary from one person to another
ex: a priori |
|
|
oligopoly
|
state at which small # of firms
note: monopolistic environment is large # of firms |
|
|
operating cycle
|
different than cash conversion cycle
operating cycle: raw material into cash # of days in inventory + # of days receivables cash conversion cycle: same, but add # of days payable |
|
|
operating risk
|
risk from operating cost structure (fixed costs)
risk from mix of fixed and variable risk of external factors |
|
|
optimal portfolio
|
on efficient frontier
highest utility for investor lies on point of tangency between efficient frontier and curve with highest possible utility 1 line points NW (efficient frontier) other lines (utility curves) point SW |
|
|
slope of efficient frontier
|
change in E(r)/change in E(SD)
|
|
|
ordinal scale
|
sorts data into categories (ranked) with similar characteristics
|
|
|
ordinary least squares
|
estimation method based on minimizing sum of squared squared residuals of regression
|
|
|
output gap
|
real GDP - potential GDP
|
|
|
overnight index swap
|
floating rate is cumulative value of single unit of currency invested at overnight rate DURING SETTLEMENT PERIOD
|
|
|
paired comparisons test
|
test for differences based on paired observations
DEPENDENT observations |
|
|
parameter
|
describes population of data
|
|
|
partial regression coefficient
|
slope coefficients in multiple regression
|
|
|
pecking order
|
internally generated funds first
debt equity |
|
|
contribution margin
|
difference between price per unit variable cost per unit
amount that each unit sold covers fixed cost |
|
|
perfect collinearity
|
exact linear relation between two or more INDEPENDENT variables
|
|
|
perfect competition
|
many firms selling identical products, many buyers, no barriers to entry, no advantage,
|
|
|
perfect price discrimination
|
extracts entire amount of consumer surplus
|
|
|
inelastic demand
|
price elasticity of 0
|
|
|
period costs
|
expensed immediately because cannot match with revenue
|
|
|
permutation
|
ORDER MATTERS
|
|
|
perpetuity
|
CF occurs one period from now
|
|
|
pet projects
|
projects where high level managers have propensity
usually do not undergo capital budgeting analysis |
|
|
Phillips Curve
|
curve that shows relationships with inflation and employment
downward sloping (inflation on Y, unemployment on X) |
|
|
cost-push inflation 2 factors
|
1) increase in money wage rate
2) increase in money prices of raw materials |
|
|
stagflation
|
rising prices and decreasing GDP
|
|
|
plain vanilla
|
one part pays fixed, other pays floating in same currency
|
|
|
poison pill
|
pre-offer takeover defense mechanism
makes it prohibitively costly for acquirer |
|
|
policy statement: 3 parts
|
1) risks
2) constraints 3) objectives/goals |
|
|
positive serial correlation
|
serial correlation where positive error for 1 observation increases chances of positive error for another; vice versa
|
|
|
potential GDP
|
value of production where: labor, capital, land, human ability are fully employed
= real GDP at full employment |
|
|
power of test
|
P(Type II) error
|
|
|
prepaid revenue = accrued revenue
|
asset account
|
|
|
price relative
|
ending price/beginning price
note: = to 1+ HPY |
|
|
P/E ratio aka earnings multiplier
|
EXPECTED eps x ESTIMATE stock price
|
|
|
probability density function
|
non-negative values: probability can be described by areas under graphed curve
|
|
|
probit model
|
qualitative-dependent varialbe multiple regression model
NORMAL DISTRIBUTION |
|
|
producer surplus
|
price-minimum supply price/quantity sold
|
|
|
project sequencing
|
to defer decision to invest in a future project until outcome of current project known
gives options to invest in future projects |
|
|
protective put
|
long stock and long put
|
|
|
provision
|
accounting term: a liability of uncertain amount/timing
|
|
|
proxy statment
|
public document that provides material facts concerning matters on which shareholders vote
|
|
|
purchase method
|
where acquirer allocates purchase price to each asset and liability at assumed value
if price exceeds fair value - goodwill |
|
|
purchasing power loss
|
loss of buying power IN PERIOD OF INFLATION
|
|
|
pure discount instrument
|
interest paid on difference between amount borrowed (significantly less than face) and amount paid back
|
|
|
pure-play method
|
estimating beta of company from comparable's beta
then adjusting for leverage/capital structure differences unlever, then lever with actual company |
|
|
put-call parity
|
relationship between put and call prices
long call, Rf, put and a stock (same strike) |
|
|
p-value
|
smallest level of significance at which null can be rejected
|
|
|
qualified special purpose entity
|
spv structured to avoid consolidation
|
|
|
quantity theory of money
|
MV=PY
or P=M(v/y) in the LONG RUN, increase in money supply brings same increase in prices |
|
|
ratio scale
|
most defined measure of scale
has all characteristics of interval measurement scales + TRUE ZERO POINT AS ORIGIN |
|
|
ratio spread
|
option strategy: long position in x call/put and short position in x call/put on same underlying
results in Rf position |
|
|
real business cycle theory
|
random fluctuations in productivity as main source of economic fluctuations
|
|
|
real exchange rate
|
relative price of foreign made good and US made good
|
|
|
real wage rate
|
quantity of goods and services 1 hour of labor can buy
= (money wage rate/price level) x 100 |
|
|
capital lease
|
PV of lease payments recorded as asset and liability on b/s
interest: operating principal: financing |
|
|
interest rate on capital lease
|
IRR of future lease payments
|
|
|
settlement value/realizable value
|
assets: cash received during sale
liabilities: UNDISCOUNTED cash expected to satisfy liabilities |
|
|
recessionary gap
|
difference between potential GDP and real GDP (current)
|
|
|
real exchange rate
|
relative price of foreign-made good to US made goods
|
|
|
relative dispersion
|
amount of dispersion relative to benchmark
|
|
|
relative frequency
|
in a interval-grouped data, # of observations in interval/total # of observations
|
|
|
relative-strength ratio
|
ratio of stock to benchmark/index
|
|
|
reserve ratio
|
fraction/percentage of bank's deposits held in reserve (as per reserve requirements)
|
|
|
residual dividend approach
|
policy where dividends paid out after equity portion of capital budget
|
|
|
retail method
|
inventory accounting method
sales value of item reduced by gross margin to calculate item's cost |
|
|
return on common equity
|
ROE when preferreds taken out
|
|
|
return on total capital
|
EBIT / sum of ST and LT debt and equity
|
|
|
revaluation of PPE
|
revalued at fair value, (not gross PPE - accum depr)
any profit/loss in income statement and/or equity GAAP - can't write up IFRS - allowed to write up, but not higher than previous write down |
|
|
impairment GAAP vs. IFRS
|
GAAP - can only write up for ASSETS HELD FOR SALE, but not assets held for use (PPE)
IFRS - recovery allowable up to previous write down value in year of impairment, loss recognized on I/S. ROE,ROA will be lower due to less earnings. But subsequent periods will be higher because of higher earnings (no impairment charge) and assets and equity will be adjusted Impairment has no impact on cash flow (same as depreciation) |
|
|
Ricardo-Barro equivalence
|
taxes and govt spending equal
budget deficit has no effect on real rates or investment |
|
|
premium
|
any return over the Rf (always T-bill)
|
|
|
T-bill
|
Rf rate (no variance)
1,3,6 month zero-coupon |
|
|
risk-neutral valuation
|
options and derivative pricing
assumes investors are risk-neutral |
|
|
Roy's safety first criterion
|
optimal portfolio is the one that minimizes PROBABILITY of a return falling below threshold
LOWER BETTER = LOWER PROBABILITY OF FALLING BELOW THRESHOLD |
|
|
runs test
|
test of weak-form EMH
checks for long trends that persist |
|
|
sales-type lease
|
type of capital lease (from lessor perspective)
PV of lease payments (lease receivable) exceeds book value of leased asset lease income = CFO (for lessee) interest = CFI |
|
|
sample selection bias
|
systematically excluding observations from population
|
|
|
sample error vs standard error
|
sample error: difference between sample and population statistic
standard error (SD/root n) |
|
|
sandwich spread
|
option strategy: short butterfly spread
|
|
|
scalper
|
trader who offers to buy/sell futures contracts
holds for brief amount of time profits on bid/ask spread |
|
|
sector neutralizing
|
measure of financial reporting quality
subtract mean/median ratio for given sector group from a given company's ratio |
|
|
securities act of 1933 and securities exchange act of 1934
|
1933: investors must receive significant information when securities are sold
1934: empowerment of SEC |
|
|
SML
|
graph of CAPM
|
|
|
settlement price
|
official price, determined by clearinghouse, where gains/losses are made from marked to market
|
|
|
short run
|
quantity of production fixed -usually capital
(but quantity of other factors can be varied) |
|
|
short-run agg supply
|
quantity of real GDP supplied and price level when money wage rate, prices of inputs, and potential GDP is CONSTANT
|
|
|
short-run macroeconomic equilibrium
|
real GDP supplied = real GDP demanded
point of intersection of AD and SAS curve |
|
|
short-run Phillips curve
|
tradeoff between unemployment and inflation
note: expected inflation and natural rate remain same |
|
|
shutdown point
|
output and price just covers total variable cost
at this point, indifferent to shut down or profit-maximize |
|
|
single-step income statement format
|
does not subtotal gross profit
|
|
|
soveriegn yield spread
|
difference between: govt bond yield in emerging country, denominated in US, with US treasury
|
|
|
stagflation
|
recession and inflation
|
|
|
straddle
|
buy put and call - same strike
motivation: high volatility |
|
|
supply-side effects
|
effects of FISCAL policy on unemployment, potential GDP, agg supply
|
|
|
growth rate
|
no issue common stock, same capital structure
|
|
|
swap spread
|
difference between fixed and treasury w/ equivalent maturity
|
|
|
targeting rule
|
decision for monetary policy that sets policy instrument at level that makes forecast equal to target
|
|
|
tax loss carry forward
|
taxable loss in current period that will reduce future taxable income
|
|
|
Taylor rule
|
rule that sets fed funds rate = equilibrium real int rate (2%/year)
plus amounts based on inflation rate and output gap |
|
|
technological efficiency
|
firm produced output by using least amount of inputs
|
|
|
temporal method
|
monetary and non-monetary assets
measured at current value on b/s to be translated to an exchange rate usually done when currency is not domestic currency |
|
|
tender
|
public offer where acquirer invites target shareholders to submit shares in return for proposed payment
|
|
|
tenor
|
ORIGINAL time to maturity on swap
|
|
|
time value of option
|
aka speculative value
= market price of option - intrinsic value |
|
|
total invested capital
|
sum of market value of equity, book value of preferred, face value of debt
|
|
|
total return
|
capital gains + income reinvestment
|
|
|
utilitarianism
|
take money from rich and give to poor
|
|
|
valuation allowance
|
reserve created against DTA
based on likelihood of realizing DTA in future accounting period |
|
|
value stocks
|
low p/e or low p/book
|
|
|
velocity
|
# of times dollar of money used to buy goods and services that make up GDP
|
|
|
vertical analysis
|
common-size analysis
|
|
|
white knight
|
3rd party hired by target company's board to purchase target - so acquirer won't acquire
|
|
|
yield & YTM
|
return if held to maturity
YTM: annual return if bond held to maturity |
|
|
zero-cost collar
|
buy put, sell call, offsetting premium from purchase of put
|
