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74 Cards in this Set

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Average (mean)
The average of the observations in a frequency distribution.
Frequent Distribution
The organization of data to show how often certain values or ranges of values occur.
Normal Distribution
Symmetric bell-shaped frequency distribution that can be defined by its mean and standard deviation.
Risk Premium
The excess return on the risky asset that is the difference between expected return on risky assets and the return on risk-free assets.
Standard Deviation
The positive square root of the variance. This is the standard statistical measure of the spread of a sample.
Value at Risk (VaR)
A popular risk measurement tool used by banks, insurance companies and other financial institutions, VaR represents the maximum possible loss in dollars for a given confidence level.
Variance
In a probability distribution, the expected value of squared deviation from the expected return.
Beta
A measure of the sensitivity of a security's return to movements in an underlying factor. It is a measure of systematic risk.
Capital Asset Pricing Model (CAPM)
An equilibrium asset pricing theory that shows that equilibrium rates of expected return on all risky assets are a function of their covariance with the market portfolio.
Capital Market Line
The efficient set of all assets, both risky and risk less, that provides the investor with the best possible opportunities.
Characteristic Line
The line relating the expected return on a security to different returns on the market.
Correlation
A standardized statistical measure of the dependence of two random variables. It is defined as the covariance divided by the standard deviations of two variables.
Covariance
A statistical measure of the degree to which random variables move together.
Diversifiable (unique, unsystematic) Risk
A risk that specifically affects a single asset or a small group of assets.
Efficient Set
Graph representing a set of portfolios that maximize expected return at each level of portfolio risk.
Homogeneous Expectations
Idea that all individuals have the same beliefs concerning future investments, profits and dividends.
Market Portfolio
In concept, a value-weighted index of all securities. In practice, it is an index such as the S&P 500 that describes the return of the entire value of the stock market, or at least that make up the index. Represents the average investors return.
Opportunity (feasible) Set
The possible expected return; standard deviation pairs of all portfolios that can be constructed from a given set of assets. Also called a feasible set.
Portfolio
Combined holding of more than one stock, bond, real estate asset, or other asset by investor.
Risk Averse
A risk-averse investor will consider risky portfolios only if they provide compensation for risk via a risk premium.
Security Market Line (SML)
A straight line that shows the equilibrium relationship between systematic risk and expected rates of return for individual securities. According to the SML, the excess return on a risky asset is equal to the excess return on the market portfolio multiplied by the beta coefficient.
Separation Principle
The principle that portfolio choice can be separated into two independent tasks: (1) determination of the optimal risky portfolio, which is a purely technical problem, and (2) the personal choice of the best mix of the risky portfolio and the risk-free asset.
Systematic (market) Risk
Any risk that affects a large number of assets, each to a greater or lesser degree.
Beta Coefficient
The response to the stock's return to a systematic risk.
Factor Model
A model in which each stock's return is generated by common factors called systematic sources of risk.
Market Model
A one-factor model for returns where the index that is used for the factor is an index of the returns on the whole market.
Asset Beta
The beta of the assets of the firm.
Cost of Equity
The required return on the company's common stock in capital markets. It is also called the equity holders' required rate of return because it is what equity holders can expect to obtain in a capital market. It is a cost from a firm's perspective.
Equity Beta
Systematic risk of a firm's stock decomposed into contributions of risk from assets and financial leverage.
Operating Leverage
The degree to which a company's cost of operations are fixed as opposed to variable. A firm with high operating costs, when compared to a firm with a low operating leverage, has relatively larger changes in EBIT with respect to a change in the sales revenue.
Weighted Average Cost of Capital (WACC)
The average cost of capital on the firm's existing projects and activities. The weighted average cost of capital for the firm is calculated by weighting the cost of each source of funds by its proportion of the total market value of the firm. It is calculated on a before and after tax basis.
Bubble Theory
security prices sometimes move widely above their true values
Efficient Market Hypothesis
the prices of securities fully reflect available information. Investors buying bonds and stocks in an efficient market should expect to obtain an equilibrium rate of return. Firms should expect to receive their "fair" value (present value) for the securities they sell
Random Walk
theory that stock price changes from day to day are at random; the changes are independent of each other and have the same probability distribution
Semistrong-Form Efficiency
theory that the market is efficient with respect to all publicly available information
Serial Correlation
correlation between the current return on a security and the return on the same security over a later period
Strong-Form Efficiency
theory that the market is efficient with respect to all available information, public or private
Weak-Form Efficiency
theory that the market is efficient with respect to historical price information
MM Proposition I
proposition of Modigliani & Miller (MM) stating that a firm cannot change the total value of its outstanding securities by changing its capital structure proportions. Also called an irrelevance result.
MM Proposition II
proposition of Modigliani & Miller (MM) stating that the cost of equity is a linear function of the firm's debt-equity ratio
MM Proposition I (corporate taxes)
proposition of Modigliani & Miller (MM) stating that by raising the debt-equity ratio, a firm can lower its taxes and thereby increase its total value. Capital structure does matter.
MM Proposition II (corporate taxes)
proposition of Modigliani & Miller (MM) stating that the cost of equity is a linear function of the firm's debt-equity ratio
MM Proposition II (no taxes)
proposition of Modigliani & Miller (MM) stating that the required return on equity is a linear function of the firm's debt-equity ratio
Pie Model
model of a firm's debt-equity ratio. It graphically depicts slices of "pie" that represent the value of the firm in the capital markets
Agency Costs
costs of conflicts of interest among shareholders, bondholders, and managers. Agency costs are the costs of resolving these conflicts. They include the costs of providing managers with an incentive to maximize shareholder wealth and then monitoring their behaviour, and the cost of protecting bondholders from shareholders. Agency costs are borne by shareholders.
Exchange Offers
offers that allow shareholders to exchange debt with stock and vice versa, either increasing or decreasing firm leverage
Marketed Claims
claims that can be bought and sold in financial markets, such as those of shareholders and bondholders
Negative Covenant
part of the indenture or loan agreement that limits or prohibits actions that the company may take
Nonmarketed Claims
claims that cannot be easily bought and sold in the financial markets, such as those of the government and litigants in lawsuits
Positive Covenant
part of the indenture or loan agreement that specifies an action that the company must abide by
Protective Covenants
parts of the indenture or loan agreement that limit certain actions a company takes during the term of the loan and protect the lender's interest
Clienteles
groups of investors attracted to different payouts
Date of Payment
date that dividend cheques are mailed
Date of Record
date on which holders of record in a firm's stock ledger are designated as the recipients of either dividends or stock rights
Declaration Date
date on which the board of directors passes a resolution to pay a dividend of a specified amount to all qualified holders of record on a specified date
Ex-Dividend Date
date four business days before the date of record for a security. An individual purchasing stock before its ex-dividend date will receive the current dividend
Homemade Dividends
an individual investor can undo corporate dividend policy by reinvesting excess dividends or selling off share of stock to receive a desired cash flow
Information Content Effect
the rise in the stock price following the dividend signal
Regular Cash Dividends
cash payments by a firm to its shareholders, usually four times a year
Stock Dividend
payment of a dividend in the form of stock rather than cash. A stock dividend comes from treasury stock, increasing the number of shares outstanding, and reduces the value of each share.
Stock Split
the increase in the number of outstanding shares of stock while making no change in shareholders' equity
Stripped Common Shares
Entitle shareholders to receive either all the dividends from one or a group of well-known companies or an instalment receipt that packages any capital gain in the form of a call option
American Options
option contracts that may be exercised anytime up to the expiration date.
Call Option
the right - but not the obligation - to buy a fixed number of shares of stock at a stated price within a specified time
Covered-Call Strategy
an options strategy whereby an investor holds a long position in an asset and sells call options on that same asset in an attempt to generate increased income from the asset
Cumulative Probability
the probability that a drawing from the standardized normal distribution will be below a particular value
European Options
an option to contract that may be exercised only on the expiration date
Exercising the Option
the act of buying or selling the underlying asset via the option contract
Expiration Date
maturity date of an option
Option
a right - but not an obligation - to buy or sell underlying assets at a fixed price during a specified time period
Pull-Call Parity
the value of a call equals the value of buying the stock plus buying the put plus borrowing at the risk-free rate
Put Option
the right to sell a specified number of shares of stock at a stated price on or before a specified time
Standardized Normal Distribution
a normal distraction with an expected value of 0 and a standard deviation of 1
Strike or Exercise Price
price at which the put option or call option can be exercised. Also called the exercise price.