Fin410 Previous Year's Final Exam Word Bank Vocab

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12b-1 fees

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Fees charged by a mutual fund to pay for marketing and distribution costs.

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5% VaR

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Statistically, there is a 5% chance the investment return will be below this amount.

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Alpha

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The abnormal rate of return on a security in excess of what would be predicted by an equilibrium model such as the CAPM.

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Anomalies

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Patterns of returns that seem to contradict the efficient market hypothesis

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Asset Allocation

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Weights of how much money to put in each asset.

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Arbitrage

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Creation of riskless profits made possible by relative mispricing among securities.

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Arithmetic average

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Simple average of returns

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Ask price

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What we BUY at, what a dealer or other trader is willing to SELL at.

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Bankers' acceptance

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An order to a bank by a customer to pay sum of money at a future date

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Back end load

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Back-end load fees are exit fees incurred when you sell your shares. They are typically 4-6% and may decrease with time. Ex: 4% fees if you leave before 3 years, no fees if leaving after that.

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Behavioral finance

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Models of financial markets that emphasize potential implications of psychological factors affecting investor behavior.

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Beta

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The sensitivity of a security’s returns to the systematic or market factor.

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Bid price

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The price at which a dealer or other traders are willing to purchase a security.

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Bid-ask spread

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The difference between the bid price (what we sell at) and the ask price (what we buy at)

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Callable bonds

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Bonds that may be repurchased by the issuer at a specified call price during the call period

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Capital allocation line

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The line representing all possible portfolios between TWO assets, the risk-free asset and one risky asset

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Capital market line

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The capital allocation line using the market index portfolio as the risky asset.

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Cash flow matching

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For immunization an example of this strategy would be to buy a zero coupon bond that pays out the exact amount you need in a future year to exactly cover a liability in that year.

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Certificate of deposit

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A time deposit with a bank

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Closed-end fund

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Sold at premium or discount to Net Asset Value to other investors

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Commercial paper

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Short-term unsecured debt issued by large corporations

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Conservatism bias

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Investors are too slow (too conservative) in updating their beliefs in response to recent evidence.

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Convertible bond

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A bond with an option allowing the bondholder to exchange the bond for a specified number of shares of common stock in the firm.

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Convexity

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The curvature of the price-yield relationship of a bond.

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Corporate bonds

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Long-term debt issued by private corporations typically paying semi-annual coupons and returning the face value of the bond

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Current Yield

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Annual coupon divided by the bond price.

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Debenture

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A bond not backed by specific collateral.

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Discount bonds

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Bonds selling below par value

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ECNs

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computer networks that allow direct trading without the need for market makers

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Efficient frontier

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When plotting various risk/return relationships given different asset weights within a portfolio, these are the highest returns for each unit of risk.

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Eurodollars

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Dollar-denominated deposits at foreign banks or foreign branches of American banks

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Exchange-traded funds

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Like a mutual fund, but you just "buy" one share of it. Like buying one share of each stock? Low transaction costs for the amount of diversity it gives.

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Expectation hypothesis

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The theory that Yields to Maturity are determined solely by expectations of future short-term interest rates

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Federal Funds Rate

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Rate that banks can lend to each other overnight

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firm specific risk

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diversifiable risk

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Floating-rate bonds

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Bonds with coupon rate periodically reset according to a specified market rate

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Framing

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Decisions are affected by how choices are posed, for example, as gains relative to a low baseline level or losses relative to a higher baseline

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Front load

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A sales commission charged on a mutual fund that affects the offering price.

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Fundamental analysis

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Research on determinants of stock value, such as earnings and dividend propsects, expectations for future interest rates, and risk of the firm.

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Geometric average

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The single per-period return that gives the same cumulative performance as the sequence of actual returns.

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Hedge fund

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A private investment pool, open to wealthy or institutional investors, that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds.

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Hybrid fund

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A category of mutual fund that is characterized by portfolio that is made up of a mix of stocks and bonds, which can vary proportionally over time or remain fixed

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Index model

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Model that relates stock returns to returns on both a broad market index as well as firm-specific influences

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Inflation rate

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Rate at which money loses purchasing power over time

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Information ratio

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Ratio of alpha to standard deviation of residual return.

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Initial public offering

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First sale of stock by a formerly private company

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Investment grade bond

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A bond rated BBB and above by Standard & Poor’s, or Baa and above by Moody’s.

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Kurtosis

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Measure of the fatness of the tails of a probability distribution, indicates likelihood of extreme outcomes

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LIBOR

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The rate at which large banks in London are willing to lend money among themselves

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Limit buy order

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Buy shares if stock trades below a specific price.

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Limit sell order

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Sell shares if stock trades above a specific price.

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Macaulay's duration

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A measure of the effective maturity of a bond, defined as the weighted average of the times until each payment, with weights proportional to the present value of the payment.

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Modified duration

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Macaulay's durations divided by 1+ yield to maturity. Measures interest rate sensitivity of bond.

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Money markets

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Include short-term, highly liquid, and relatively low-risk debt instruments. Money market securities can consist of negotiable certificates of deposit (CDs), bankers U.S. Treasury bills, commercial paper, municipal notes, federal funds and repos.acceptances,

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Municipal bonds

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Tax-exempt bonds issued by the state and local governments

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Multifactor models

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Models of security returns positing that returns respond to several systematic factors

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Net Asset Value

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Assets minus liabilities expressed on a per-share basis.

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Nominal interest rate

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Interest rate not adjusted for purchasing power.

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Open-end fund

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A fund that issues or redeems its shares at net asset value.

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Passive management

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Having a broad index of securities with very little management over time. The idea is that the costs of managing would remove all potential gains from actively managing.

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Preferred stock

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Stock without control in a company, gets paid before common stock in liquidation, often given a specified dividend.

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Premium bonds

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Bonds selling above par value

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Price-weighted average

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An average computed by adding the prices of the stocks and dividing by a “divisor.”

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Primary market

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A market in which new issues of securities are offered to the public.

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Private placement

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Government securities issued at a discount from face value and returning the face amount at maturity. The most marketable of all money market instruments

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Probability distribution

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List of possible outcomes with associated probabilities

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Prospect theory

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Behavioral theory that investor utility depends on gains or losses from starting position, rather than on their levels of wealth.

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Prospectus

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Document that gives a description of the firm and the security it is issuing

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Random walk

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The notion that stock price changes are random and unpredictable

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Real interest rate

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Interest rate taking into account inflation.

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Reinvestment rate risk

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The risk that reinvestments (such as the money received from a coupon payment) will receive less interest than the original investment promises.

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Relative strength

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Recent performance of a given stock or industry compared to that of a broader market index

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Repurchase agreements

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Short-term sales of government securities with an agreement to repurchase the securities at a higher price

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Resistance level

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A price level above which it is supposedly unlikely for a stock or stock index to rise, believed to be determined by market psychology.

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Secondary market

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Previously issued securities are traded among investors

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Securitization

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Pooling loans into standardized securities backed by those loans, which can then be traded like any other security

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Security characteristic line

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A plot of a security’s excess return as a function of the excess return of the market.

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Security market line

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A graphical representation of the theoretical expected return-beta relationship of the CAPM.

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Semi strong form efficient markets hypothesis

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Hypothesis states that all publicly available information regarding the prospects of a firm already must be reflected in the stock price. Such information includes, in addition to past prices, fundamental data on the firm’s product line, quality of management, balance sheet composition, patents held, earning forecasts, and accounting practices.

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Separation property

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The property that implies 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

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Sharpe ratio

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This measures expected return per unit of risk. E[R] / sigma

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Short interest

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The short ratio for a public company is a metric signaling prevailing investors' sentiment. The ratio is calculated by dividing the number of shares sold short by the average daily trading volume

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Short sale

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The sale of shares not owned by the investor but borrowed through a broker and later purchased to replace the loan.

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Skewness

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Measure of the asymmetry of a probability distribution.

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Soft dollars

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The value of research services brokerage houses provide "free of charge" in exchange for the investment manager's business

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Stop buy order

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Buy stock if it trades above a specific price.

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Strong form efficient markets hypothesis

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Similar to Semi strong, but also includes insider information. Includes: Past prices, earnings forecasts, and internal information such as unannounced problems the company may see.

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Support level

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A price level below which it is supposedly unlikely for a stock or stock index to rise, believed to be determined by market psychology.

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Systematic risk

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nondiversifiable risk; risk factors common to the whole economy

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Technical analysis

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Research on recurrent and predictable stock price patterns and on proxies for buy or sell pressure in the market.

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Treasury bills

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Short-term government securities issued at a discount from face value and returning the face amount at maturity

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Treasury notes

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Debt obligations of the federal government with original maturities of one year or more

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Trin statistic

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The ratio of average volume in declining issues to average volume in advancing issues.

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Turnover

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The ratio of the trading activity of a portfolio to the assets of the portfolio.

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Underwriters

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Purchase securities from an issuing company and resell them.

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Weak form efficient markets hypothesis

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Only includes historical data on the firm.

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Yankee bonds

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Foreign bonds sold in the U.S.

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Yield to maturity

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The discount rate that makes the present value of a bond’s payments equal to its price

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Yield curve

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A graph of yield to maturity as a function of term to maturity.