Financial Terms 2

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bid ask spread

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he difference in price between the highest price that a buyer is willing to pay for an asset
and the lowest price for which a seller is willing to sell it.
We associate lower bid-ask spreads with more liquid securities. Example; Currency

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Market Maker

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provide liquidity by taking the opposite side of a transaction. If an investor wants to buy, the market-maker sells and vice vers

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volatility

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he term volatility indicates how much and how quickly the value of an investment, market, or market sector changes.
One measure of the relative volatility of a particular stock to the market is its beta

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Beta

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also known as “beta coefficient” or “systematic risk.”

Beta is a measure of an investment's relative volatility. The higher the beta, the more sharply the value of the investment can be expected to fluctuate in relation to a market index.

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Alpha

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Alpha is a financial measure giving the difference between a fund's actual return and its expected level of performance, given its level of risk (as measured by beta). A positive alpha indicates that a fund has performed better than expected based on its beta, whereas a negative alpha indicates poorer performance.

* αi < 0: the investment has earned too little for its risk (or, was too risky for the return)
* αi = 0: the investment has earned a return adequate for the risk taken
* αi > 0: the investment has a return in excess of the reward for the assumed risk

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Alpha Generation

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Alpha generation platforms are used by quantitative analysts to locate excess return in the capital market.[1] They enable quantitative analysts to develop complex mathematical and statistical models that help determine whether or not a specific investment is profitable. In many quant-driven funds, these computer-driven models make the final decision on whether to buy or sell an investment

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Market Proxy

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A broad representation of the overall market. A market proxy is chosen and used to simplify studies that require a market variable, statistic or comparison.

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Sharp Ratio

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Sharpe to measure risk-adjusted performance. The Sharpe ratio is calculated by subtracting the risk-free rate - such as that of the 10-year U.S. Treasury bond - from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. The Sharpe ratio formula is:

= (Rp - Rf) / SDp
Rp: Expected rate of return
Rf: Risk free rate
SDp: Standard deviation of the portfolio returns

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expected excess return

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The return on an investment as estimated by an asset pricing model. It is calculated by taking the average of the probability distribution of all possible returns. For example, a model might state that an investment has a 10% chance of a 100% return and a 90% chance of a 50% return. The expected return is calculated as:

Expected Return = 0.1(1) + 0.9(0.5) = 0.55 = 55%.

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Risk adjusted Return

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Often we subtract from the rate of return on an asset a rate of return from another asset that has similar risk. This gives an abnormal rate of return that shows how the asset performed over and above a benchmark asset with the same risk. We can also use the beta against the benchmark to calculate an alpha, which is also risk-adjusted performance.

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Fama/French factor

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A factor model that expands on the capital asset pricing model (CAPM) by adding size and value factors in addition to the market risk factor in CAPM. This model considers the fact that value and small cap stocks outperform markets on a regular basis. By including these two additional factors, the model adjusts for the outperformance tendency, which is thought to make it a better tool for evaluating manager performance.

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Capital Asset Pricing Model

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The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. If this expected return does not meet or beat the required return, then the investment should not be undertaken. The security market line plots the results of the CAPM for all different risks (betas).

Using the CAPM model and the following assumptions, we can compute the expected return of a stock in this CAPM example: if the risk-free rate is 3%, the beta (risk measure) of the stock is 2 and the expected market return over the period is 10%, the stock is expected to return 17% (3%+2(10%-3%)).

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Mean variance optimization (MVO)

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Mean variance optimization (MVO) is a quantitative tool which will allow you to make this allocation by considering the trade-off between risk and return.

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Market capitalization often market cap)

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Market capitalization/capitalisation (often market cap) is a measurement of the size of a business enterprise (corporation) equal to the share price times the number of shares outstanding of a public company.

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Book Value

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The value at which an asset is carried on a balance sheet. To calculate, take the cost of an asset minus the accumulated depreciation.

2. The net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities.

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Book value is the accounting value of a firm. It has two main uses:

1. It is the total value of the company's assets that shareholders would theoretically receive if a company were liquidated.

2. By being compared to the company's market value, the book value can indicate whether a stock is under- or overpriced.

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Put option

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An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. This is the opposite of a call option, which gives the holder the right to buy shares.
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A put becomes more valuable as the price of the underlying stock depreciates relative to the strike price.

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Call option

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An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period.

Investopedia Says
Investopedia explains Call Option
It may help you to remember that a call option gives you the right to "call in" (buy) an asset. You profit on a call when the underlying asset increases in price.

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Options

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A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date).


Call options give the option to buy at certain price, so the buyer would want the stock to go up.

Put options give the option to sell at a certain price, so the buyer would want the stock to go down.

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ETF

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Exchange Traded Fund:
An exchange-traded fund, or ETF, is an investment product representing a basket of securities that track an index such as the Standard & Poor's 500 Index. ETFs, which are available to individual investors only through brokers and advisers, trade like stocks on an exchange.

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OT

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Over-the-counter (OTC) or off-exchange trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. It is contrasted with exchange trading, which occurs via facilities constructed for the purpose of trading (i.e., exchanges), such as futures exchanges or stock exchanges.