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499 Cards in this Set

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Questions
Answers
Abnormal Return
The return earned on a financial asset in excess of that required to compensate for the risk of the asset.
Account Executive (alternatively, Registered Representative)
A representative of a broker-age firm whose primary responsibility is servicing the accounts of individual investors.
Accounting Beta
A relative measure of the sensitivity of a firm's accounting earnings to changes in the accounting earnings of the market portfolio.
Accounting Earnings (alternatively, Reported Earnings)
A firm's revenues less its expenses. Equivalently, the change in the firm's book value of the equity plus dividends paid to shareholders.
Accrued Interest
Interest earned but. not yet paid.
Active Efficient Set
The combinations of securities that offer investors both maximum expected active return for varying levels of active risk and minimum active risk for various levels of expected active return.
Active Management
A form of investment management that involves buying and selling financial assets with the objective of earning positive abnormal returns.
Active Position
The difference between the percentage of an investor's portfolio invested in a particular financial asset and the percentage of a benchmark portfolio invested in that same asset.
Actual Margin
The equity in an investor's margin account expressed as a percentage of the account's total market value (for margin purchases) or total debt (for short sales).
Adjusted Beta
An estimate of a security's future beta, derived initially from historical data, but modified by the assumption that the security's "true" beta has a tendency over time to move toward the market average of 1.0.
Adverse Selection
A problem in pricing insurance in that persons with above-average risk are more likely to purchase insurance than are those with below-average risk.
Aggressive Stocks
Stocks that have betas greater than 1.
Allocationally Efficient Market
A market for securities in which those firms with the most promising investment opportunities have access to the needed funds.
Alpha
The difference between a security's expected return and its benchmark return.
American Depositary Receipts (ADRs)
Financial assets issued by U.S. banks that represent indirect ownership of a certain number of shares of a specific foreign firm. These shares are held on deposit in a hank in the firm's home country.
American Option
An option that can be exercised at any time until and including its expiration date.
Annual Percentage Rate (APR)
With respect to a loan, the APR is the yield-to-maturity of the loan, computed using the most frequent time between payments as the compounding interval.
Anomaly
An empirical regularity that is not predicted by any known asset pricing model.
Approved List
A list of securities that an investment organization deems worthy of accumulation in a given portfolio. In an organization that uses an approved list, typically, any security on the list may he purchased by the organization's portfolio managers without additional authorization.
Arbitrage
The simultaneous purchase and sale of the same, or essentially similar, security in two different markets for advantageously different prices.
Arbitrage Portfolio
A portfolio that requires no investment, has no sensitivity to any factor, and has a positive expected return. More strictly, a portfolio that provides inflows in some circumstances and requires no outflows under any circumstances.
Arbitrage Pricing Theory
An equilibrium model of asset pricing that states that the expected return on a security is a linear function of the security's sensitivity to various common factors.
Arbitrageur
A person who engages in arbitrage.
Asked (or Ask) Price (alternatively , Offer Price)
The price at which a market-maker is willing to sell a specified quantity of a particular security.
Asset Allocation
The process of determining the optimal division of an investor's portfolio among available asset classes.
Asset Class
A broadly defined generic group of financial assets, such as stocks or bonds.
Asymmetric Information
A situation in which one party has more information than an-other party.
At the Money
An option whose exercise price is roughly equal to the market. price of its underlying asset.
Attribute
See Factor Loading.
Automated Bond System (ABS)
A computer system established by the New York Stock Ex-change to facilitate the trading of bonds.
Average Tax Rate
The amount of taxes paid expressed as a percentage of the total income subject to tax.
Bank Discount Basis
A method of calculating the interest rate on a pure-discount fixed-income security that uses the principal of the security as the security's cost.
Bankers' Acceptance
A type of money market instrument. It is a promissory note issued by a business debtor, with a stated maturity date, arising out of a business transaction. A bank, by endorsing the note, assumes the obligation. If this obligation becomes actively traded, it is referred to as a hankers' acceptance.
Basis
The difference between the spot price of an asset and the futures price of the same asset.
Basis Point
1/100 of 1%
Basis Risk
The risk to a futures investor that the basis will widen or narrow.
Bearer Bond
A bond that has attached coupons representing the right to receive interest payments. The owner submits each coupon on its specified date to receive payment. Ownership is transferred simply by the seller's endorsing the bond over to the buyer.
Benchmark Portfolio
A portfolio against which the investment performance of an investor can be compared for the purpose of determining investment skill. A benchmark port-folio represents a relevant and feasible alternative to the investor's actual portfolio and, in particular, is similar in terms of risk exposure.
Best-Efforts Basis
A security underwriting in which the members of the investment banking group serve as agents instead of dealers, agreeing only to obtain for the issuer the best price that the market will pay for the security.
Beta (alternatively, Beta Coefficient or Market Beta)
A relative measure of the sensitivity of an asset's return to changes in the return on the market portfolio. Mathematically, the
Commodity Futures Trading Commission (CFTC)
A federal agency established by the Commodity Futures Trading Commission Act of 1974 that approves (or disapproves) thecreation of new futures contracts and regulates the trading of existing futures contracts.
Common Factor
A factor that affects the return on virtually all securities to a certain extent.
Common Stock
Legal representation of an equity (or ownership) position in a corporation.
Comparative Performance Attribution
Comparing the performance of a portfolio with thatof one or more other portfolios (or market indices) in order to determine the sourcesof the differences in their returns.
Competitive Bidding
With respect to selecting an underwriter, the process of an issuer soliciting bids on the underwriting and choosing the underwriter offering the best over-all terms.
Competitive Trader
See Floor Trader.
Complete Market
A market in which there are enough unique securities so that for any given contingency an investor can construct a portfolio that will produce a payoff if that contingency occurs.
Composite Stock Price Tables
Price information provided on all stocks traded on the national exchanges, the regional stock exchanges, the NASDAQ system, and the Instinet system.
Compounding
The payment of interest on interest.
Computer-Assisted Order
Routing and Execution System (CORES) A computer system for trading all but the 150 most active stocks on the Tokyo Stock Exchange.
Computer-Assisted Trading System (CATS)
A computer system for trading stocks on the Toronto Stock Exchange that involves a computer file containing a publicly accessible limit order book.
Consolidated Quotations System
A system that lists current bid and asked prices of specialists on the national and regional stock exchanges and of certain over-the-counter dealers.
Consolidated Tape
A system that reports trades that occur on the national stock exchanges, the regional stock exchanges, the NASDAQ system, and the instinct system.
Constant-Growth Model
A type of dividend discount model in which dividends are assumed to exhibit a constant growth rate.
Consumer Price Index
A cost-of-living index that is representative of the goods and services purchased by U.S. consumers.
Contingent Deferred Sales Charge
A fee charged by a mutual fund to its shareholders if they sell their shares within a specified time after initially purchasing them.
Contingent Immunization
A form of bond management that entails both passive and active elements. Under contingent immunization, as long as favorable results are obtained, the bond portfolio is actively managed. However, if unfavorable results occur, then the port-folio is immediately immunized.
Continuous Market
A security market in which trades may occur at any time during business hours.
Contrarian
An investor who has opinions opposite those of most other investors, leading to actions such as buying recent losers and selling recent winners.
Convertible Bond
A bond that may, at the holder's option, be exchanged for other securities, often common stock.
Convexity
The tendency for bond prices to change asymmetrically relative to yield changes. Typically, for a given yield change, a bond will rise in price more if the yield change is negative than it will fall in price if the yield change is positive.
Corner Portfolio
An efficient portfolio possessing the property that, if it is combined with any adjacent corner portfolio, the combination will produce another efficient portfolio.
Correlation Coefficient
A statistical measure similar to covariance, in that it measures the degree of mutual variation between two random variables. The correlation coefficient rescales covariance to facilitate comparison among pairs of random variables. The correlation coefficient is bounded by the values +1 and -1.
Cost of Carry
The differential between the futures and spot prices of a particular asset. It equals the interest forgone less the benefits plus the costs of ownership.
Cost-of-Living Index
A collection of goods and services, and their associated prices, designed to reflect changes over time in the cost of making normal consumption expenditures.
Counterparty Risk
The risk posed by the possibility that the person or organization with which an investor has entered into a financial arrangement may fail to make required payments.
Coupon Payments
The periodic payment of interest on a bond.
Coupon Rate
The annual dollar amount of coupon payments made by a bond expressed as a percentage of the bond's par value.
Coupon Stripping
The process of separating and selling the individual cash flows of Treasury notes or bonds.
Covariance
A statistical measure of the relationship between two random variables. It measures the extent of mutual variation between two random variables.
Covered Call Writing
The process of writing a call option on an asset owned by the option writer.
Cross-Deductibility
An arrangement among federal and state tax authorities that permits state taxes to be deductible expenses for federal tax purposes and federal taxes to be deductible expenses for state tax purposes.
Crown jewel Defense
A strategy used by corporations to ward off hostile takeovers. The strategy entails the target company's selling off its most attractive assets to make itself less attractive to the acquiring firm.
Cumulative Dividends
A common feature of preferred stock that requires that the issuing corporation pay all previously unpaid preferred stock dividends before any common stock dividends may he paid.
Cumulative Voting System
In the context of a corporation, a method of voting in which a stockholder is permitted to give any one candidate for the board of directors a maximum number of votes equal to the number of shares owned by that shareholder times the number of directors being elected.
Currency Risk
See Exchange Risk.
Current Yield
The annual dollar amount of coupon payments made by a bond expressed as a percentage of the bond's current market price.
Customer's Agreement
See Hypothecation Agreement.
Date of Record
The date, established quarterly by a corporation's board of directors, on which the stockholders of record are determined for the purpose of paying a cash or stock dividend.
Day Order
A trading order for which the broker will attempt to fill the order only during the day on which it was entered.
Day-of-the-Week Effect (alternatively, Weekend Effect)
An empirical regularity whereby stock returns appear to be lower on Mondays than on other days of the week.
Dealer (alternatively, Market-Maker)
A person who facilitates the trading of financial assets by maintaining an inventory in particular securities. The dealer buys for and sells from this inventory, profiting from the difference in the buying and selling prices.
Dealer's Spread
The bid-ask spread quoted by a security dealer.
Debenture
A bond that is not secured by specific property.
Debit Balance
The dollar amount borrowed from a broker as the result of a margin purchase.
Debt Refunding
The issuance of new debt for the purpose of paying off currently maturing debt.
Dedicated Portfolio
A portfolio of bonds that provides its owner with cash inflows that are matched against a specific stream of cash outflows.
Default Premium
The difference between the promised and expected yield-to-maturity on a bond arising from the possibility that the bond issuer might default on the bond.
Defensive Stocks
Stocks that have betas less than 1.
Delist
The process of removing a security's eligibility for trading on an organized security exchange.
Delta
See Hedge Ratio.
Demand-to-Buy Schedule
A description of tile quantities of a security that an investor is pre-pared to purchase at alternative prices.
Demand Deposit
A checking account at a financial institution.
Depository Trust Company
A central computerized depository for securities registered in the names of member firms. Members' security certificates are immobilized and computerized records of ownership are maintained. This arrangement permits electronic transfer of the securities from one member to another as trades are conducted between the members' clients
Discount Broker
An organization that offers a limited range of brokerage services and charges fees substantially below those of brokerage firms that provide a full range of services.
Discount Factor
The present value of $1 to be received in a specified number of years.
Discounting
The process of calculating the present value of a given stream of cash flows.
Discount Rate
The interest rate used in calculating the present value of future cash flows.The discount rate reflects not only the time value of money but also the riskiness of thecash flows.
Discretionary Order
A trading order that permits the broker to set the specifications for the order.
Disintermediation
A pattern of funds flow whereby investors withdraw funds from financial intermediaries, such as banks and savings and loans, because market interest rates exceed the maximum interest rates that these organizations are permitted to pay. The investors reinvest their funds in financial assets that pay interest rates not subject to ceilings
Distribution (12b-1) Fee
An annual fee charged by a mutual fund to its shareholders to pay for advertising, promoting, and selling the fund to new investors.
Diversification
The process of adding securities to a portfolio in order to reduce the port portfolio's unique risk and, thereby, the portfolio's total risk.
Dividend Decision
The process of determining the amount of dividends that a corporation will pay its shareholders.
Dividend Discount Model
The term used for the capitalization of income method of valuation as applied to common stocks. All variants of dividend discount models assume that the intrinsic value of a share of common stock is equal to the discounted value of the dividends forecast to be paid on the stock
Dividends
Cash payments made to stockholders by the corporation.
Dividend Yield
The current annualized dividend paid on a share of common stock, ex-pressed as a percentage of the current market price of the corporation's common stock.
Dollar-Weighted Return
A method of measuring the performance of a portfolio over a particular period of time. It is the discount rate that makes the present value of cash flows into and out of the portfolio, as well as the portfolio's ending value, equal to the port-folio's beginning value
Domestic Return
The return on an investment in a foreign financial asset, excluding the impact of exchange rate changes.
Double Auction
Bidding among both buyers and sellers for a security that may occur when the specialist's bid-ask spread is large enough to permit sales at one or more prices with-in the spread.
Duration
A measure of the average maturity of the stream of payments generated by a financial asset. Mathematically, duration is the weighted average of the lengths of time until the asset's remaining payments are made. The weights in this calculation are the proportion of the asset's total present value represented by the present value of the respective cash flows
Earnings per Share
A corporation's accounting earnings divided by the number of its common shares outstanding.
Earnings-Price Ratio
The reciprocal of the price-earnings ratio.
Econometric Model
A statistical model designed to explain and forecast certain economic phenomena.
¶Economic Earnings
The change in the economic value of the firm plus dividends paid to shareholders.
Economic Value of the Firm
The aggregate market value of all securities issued by the firm.
Effective Duration
A measure of a bond's duration that accounts for the ability of either the bond's issuer or the bondholder to cause the actual stream of cash payments to differ from that which would be received if the bond were paid off as promised over its entire life.
Efficient Diversification
The process of creating diversification in a portfolio 4. selecting securities in a manner that explicitly considers the standard deviations and correlations of the securities.
Efficient Market
A market for securities in which every security's price equals its investment value at all times, implying that a specified set of information is fully and immediately reflected in market prices.
Efficient Portfolio
A portfolio within the feasible set that offers investors both maximum expected return for varying levels of risk and minimum risk for varying levels of expected return.
Efficient Set (Frontier)
The set of efficient portfolios.
Efficient Set Theorem
The proposition that investors will choose their portfolios only from the set of efficient portfolios.
Emerging Markets
Financial markets in countries that have a relatively low level of per capita gross domestic product, improving political and economic stability, a currency that is convertible into Western countries' currencies, and securities available for investment by foreigners
Empirical Regularities
Differences in returns on securities that occur with regularity from period to period. See also Anomaly.
Endogenous Variable
In the context of an econometric model, an economic variable that rep-resents the economic phenomena explained by the model.
Equal-Weighted Market Index
A market index in which all the component securities con-tribute equally to the value of the index, regardless of the various attributes of those securities.
Equilibrium Expected Return
The expected return on a security assuming that the security is correctly priced by the market. This "fair" return is determined by an appropriate asset pricing model.
Equipment Obligation (alternatively, Equipment Trust Certificate)
A bond that is backed by specific pieces of equipment that, if necessary, can be readily sold and delivered to a new owner.
Equipment Trust Certificate
See Equipment Obligation.
Equity Premium
The difference between the expected rate of return on common stocks and the riskfree return.
Equity Swap
A contract between two counterparties wherein one pays the other a fixed stream of cash flows and in return receives a varying stream whose cash flows are regularly reset on the basis of the performance of a given stock or a given stock market index.
Equivalent Yield
The annualized yield-to-maturity on a fixed-income security sold on a discount basis.
Eurobond
A bond that is offered outside of the country of the borrower and usually outside of the country in whose currency the security is denominated.
Eurodollar Certificate of Deposit
A certificate of deposit denominated in U.S. dollars and issued by banks domiciled outside of the United States.
Eurodollar Deposit
A U.S. dollar-denominated time deposit held at a bank domiciled out-side of the United States.
European Option
An option that can be exercised only on its expiration date. Ex Ante Before the fact; future.
Excess Return
The difference between the return on a security and the return on the risk-free asset
Exchange Distribution or Acquisition
A trade involving a large block of stock on an organized security exchange whereby a brokerage firm attempts to execute the order by finding enough offsetting orders from its customers.
Exchange Risk (alternatively, Currency Risk)
The uncertainty in the return on a foreign financial asset owing to unpredictability regarding the rate at which the foreign currency can be exchanged into the investor's own currency.
Ex-Distribution Date
The date on which ownership of stock is determined for purposes of paying stock dividends or issuing new shares due to stock splits. Owners purchasing shares before the ex-distribution date receive the new shares in question. Owners purchasing shares on or after the ex-distribution date are not entitled to the new shares
Ex-Dividend Date
The date on which ownership of stock is determined for purposes of paying cash dividends. Owners purchasing shares before the ex-dividend date receive the dividend in question. Owners purchasing shares on or after the ex-dividend date are not entitled to the dividend.
Exercise Price (alternatively, Striking Price)
In the case of a call option, the price at which an option buyer may purchase the underlying asset from the option writer. In the case of a put option. the price at which an option buyer may sell the underlying asset to the option writer.
Exogenous Variable
In the context of an econometric model, an economic variable taken as given and used in the model to explain the model's endogenous variables.
Expectations Hypothesis
A hypothesis that the current futures price of an asset equal the expected spot price of the asset on the delivery date of the futures contract.
Expected Rate of Inflation
That portion of inflation experienced over a given period of time that was anticipated by investors.
Expected Return
The return on a security (or portfolio) that an investor anticipates receiving over a holding period.
Expected Return Vector
A column of numbers that correspond to the expected returns for a set of securities.
Expected Value
See Mean.
Expected Yield-to-Maturity
The yield-to-maturity on a bond calculated as a weighted average of all possible yields that the bond might produce under different scenarios of default or late payments, where the weights are the probabilities of each scenario occurring.
Expiration Date
The date on which the right to buy or sell a security under an option con-tract ceases.
Ex Post
After the fact; historical.
Ex Post Alpha
A portfolio's alpha calculated on an ex post basis. Mathematically, over an evaluation interval, it is the difference between the average return on the portfolio and the overage return on a benchmark portfolio.
Ex Post Selection Bias
In the context of constructing a security valuation model, the use of securities that have performed well and the avoidance of securities that have performed poorly, thus making the model appear more effective than it truly is.
Ex-Rights Date
The date on which ownership of stock is determined for purposes of granting rights to purchase new stock in a rights offering. Owners purchasing shares before the ex-rights date receive the rights in question. Owners purchasing shares on or after the ex-rights date are not entitled to the rights.
Externally Efficient Market
A market for securities in which information is quickly and widely disseminated, thereby allowing each security's price to adjust rapidly in an unbiased manner to new information so that the price reflects investment value.
Face Value
See Principal.
Factor (alternatively, Index)
An aspect of the investment environment that influences the re-turns of financial assets. To the extent that a factor influences a significant number of financial assets, it is termed common or pervasive.
Factor Beta
A relative measure of the mutual variation of a particular common factor with the return on the market portfolio. Mathematically, a factor beta is the covariance of the factor with the market portfolio, divided by the variance of the market portfolio.
Factor Loading (alternatively, Attribute or Sensitivity)
A measure of the responsiveness of a security's returns to a particular common factor.
Factor Model (alternatively, Index Model)
A return-generating process that attributes the return on a security to the security's sensitivity to the movements of various common factors.
Factor Risk
That part of a security's total risk that is related to moves in various common factors and, hence, cannot he diversified away.
Factor Risk Premium
The expected return over and above the riskfree rate on a portfolio that has unit sensitivity to a particular factor and zero sensitivity to all other factors.
Fail to Deliver
A situation in which a seller's broker is unable to deliver the traded security to the buyer's broker on or before the required settlement date.
Fallen Angel
A high-yield bond that was of investment grade when originally issued.
Feasible Set (alternatively, Opportunity Set)
The set of all portfolios that can be formed from the group of securities being considered by an investor.
Federally Sponsored Agency
A privately owned organization with government hacking that issues securities and uses the proceeds to support the granting of various types of special-purpose loans.
Fill-or-Kill Order
A trading order that is canceled if the broker is unable to execute it immediately.
Financial Analyst (alternatively, Security Analyst or Investment Analyst)
An individual who analyzes financial assets in order to determine the investment characteristics of those as-sets and to identify mispricings among those assets.
Financial Asset
See Security.
Financial Institution
See Financial Intermediary.
Financial Intermediary (alternatively, Financial Institution)
An organization that issues financial claims against itself and uses the proceeds of the issuance primarily to purchase financial assets issued by individuals, partnerships, corporations, government entities, and other financial intermediaries.
Financial Investment
An investment in financial assets.
Financial Leverage
The use of debt to fund a portion of an investment.
Financial Market (alternatively, Security Market)
A mechanism designed to facilitate the ex-change of financial assets by bringing orders from buyers and sellers of securities together.
Firm Commitment
An arrangement between underwriters and a security issuer whereby the underwriters agree to purchase, at the offering price, all of the issue not bought by the public.
Floating Rate (alternatively, Variable Rate)
A rate of interest on a financial asset that may vary over the life of the asset, depending on changes in a specified indicator of current market interest rates.
Floor Broker (alternatively, Two-Dollar Broker)
A member of an organized security ex-change who assists commission brokers when there are too many orders flowing into the market for the commission brokers to handle alone.
Floor Order Routing and Execution System (FORES)
A computer system for trading the 150 most active stocks on the Tokyo Stock Exchange.
Floor Trader (alternatively, Competitive Trader or Registered Competitive Market-Maker or Registered Trader)
A member of an organized security exchange who trades solely for his or her own account and is prohibited by exchange rules from handling public orders.
Foreign Return
The return on an investment in a foreign financial asset, including the impact of exchange rate changes.
Forward Rate
The interest rate that links the current spot interest rate over one holding period to the current spot interest rate over a longer holding period. Equivalently, the interest rate agreed to at a point in time at which the associated loan will be made at a futures date.
Fourth Market
A secondary security market in which investors (typically, financial institutions) trade securities directly with one another, bypassing the brokers and dealers oil organized security exchanges and the over-the-counter market.
Fundamental Analysis
A form of security analysis that seeks to determine the intrinsic value of securities on the basis of underlying economic factors. These intrinsic values are compared with current market prices to estimate current levels of mispricing.
Futures (Futures Contract)
An agreement between two investors under which the seller promises to deliver a specific asset on a specific future date to the buyer for a predetermined price to be paid on the delivery date.
Futures Commission Merchant (FCM)
A firm that carries out customers' Order involving futures.
Futures Option (alternatively, Option on Futures)
An option contract for which the deliverable asset is a specific futures contract.
Generally Accepted Accounting Principles (GAAP)
Accounting rules established by recognized U.S. authorities, such as the Financial Accounting Standards Board (FASB).
General Obligation Bond
A municipal bond that is backed by the full faith and credit of theissuing agency.
Geometric Mean Return
The compounded per period average rate of return on a financial asset over a specified time interval.
Good-Till-Canceled Order
See Open Order.
Greenmail
An offer by the management of a corporation that is the target of an attempted hostile takeover to repurchase its shares from the hostile bidder at an above-market pike.
Growth Stock
A stock that has experienced or is expected to experience rapidly increasing earnings per share and is often characterized as having low earnings-to-price and book value-to-market-value ratios.
Guaranteed Bond
A bond issued by one corporation hut backed by another corporation.
Hedger
An investor in futures contracts whose primary objective is to offset an otherwise risky position.
Hedge Ratio (alternatively, Delta)
The expected change in the value of an option for each dollar change in the market price of the underlying asset.
High-Yield Bonds
See Speculative-Grade Bonds.
Historical Beta
An estimate of a security's beta, derived solely ft from historical returns. Equivalently, the slope of the market model or the ex-post characteristic line.
Holding Period
The length of time over which an investor is assumed to invest a given sum of money.
Holding-Period Return
The rate of return on an investment over a given holding period. Holdout Sample See Out-of-Sample Data.
Holiday Effect
The observation that average stock returns have been abnormally high around federal holidays.
Homogeneous Expectations
A situation in which all investors possess the same perceptions with regard to the expected returns, standard deviations, and co-variances of securities.
Horizon Analysis
A form of active bond management whereby a single holding period is selected for analysis, and possible yield structures at the end of the period are considered. Bonds with the most attractive expected returns under the alternative yield structures are selected for the portfolio.
Hypothecation Agreement (alternatively, Customer's Agreement)
A legal arrangement between a brokerage firm and an investor that permits the brokerage firm to pledge the investor's securities as collateral for bank loans, provided that the securities were purchased through the investor's margin account.
Idiosyncratic Risk
See Nonfactor Risk.
Immunization
A bond portfolio management technique that permits an investor to meet a promised stream of cash outflows with a high degree of certainty.
Implied Volatility
The risk of an asset derived from an options valuation model assuming that an option on the asset is fairly priced by the market.
Implied Return
See Internal Rate of Return.
Income Bond
A bond for which the size of the interest payments varies on the basis of the income of the issuer.
Indenture
A legal document formally describing the terms of the legal relationship between a bond issuer and bondholders.
Index
See Factor.
Index Arbitrage
An investment strategy that involves buying a stock index futures contract and selling the individual stocks in the index, or selling a stock index futures contract and buying the individual stocks in the index. The strategy is designed to take advantage of a mispricing between the stock index futures contract and the underlying stocks.
Indexation
A method of linking the payments associated with a bond to the price level in order to provide a certain real return on the bond.
Index Fund
A passively managed investment in a diversified portfolio of financial assets de-signed to mimic the investment performance of a specific market index.
Index Model
See Factor Model.
Indifference Curve
All combinations of portfolios, considered in terms of expected returns and risk, that provide an investor with an equal amount of satisfaction.
Individual Retirement Account
A tax-advantaged means for people to set aside income (either on a before-tax or an after-tax basis) and avoid taxes on the subsequent earnings until those earnings and the original funds are withdrawn.
Industrial Development Bond (IDB)
A form of revenue bond used to finance the purchase or construction of industrial facilities that are leased by the issuing municipality to firms on a favorable basis.
Inefficient Portfolio
A portfolio that does not satisfy the criteria of an efficient portfolio and, hence, does not lie on the efficient set.
Inflation
The rate of change in a price index over a certain period of dine. Equivalently, the percentage change in the purchasing power of a unit of currency over a certain period of time.
Inflation Hedge
An asset that preserves the value of its purchasing power over time despite changes in the price level.
Inflation-indexed security
A type of fixed-income security that offers investors a promised (pretax) real rate of return by adjusting the security's principal and coupon payments for changes in a specified price index.
Information Coefficient
The correlation coefficient between a security analyst's predicted returns and subsequent actual returns that is used to measure the accuracy of the analyst's predictions.
Information Content of Dividends Hypothesis
The proposition that dividend announcements contain inside information about a corporation's future prospects.
Initial Margin Requirement
The minimum percentage of a margin purchase (or short sale) price that must come from the investor's own funds.
Initial Public Offering (ipo) (alternatively, Unseasoned Offering)
The first offering of the shares of a company to the public.
Initial Wealth
The value of an investor's portfolio at the beginning of a holding period.
Inside Quotes (alternatively, NBBO)
The highest bid price and the lowest asked price for a given stock offered by a group of dealers in a particular stock.
Insider
Narrowly defined, a stockholder, officer, or director of a corporation who owns a "significant" proportion of a corporation's stock. More broadly defined, anyone who has access to information that is both "materially" related to the value of a corporation's securities and unavailable to the general public.
Instinet
Acronym for institutional Network. A computerized communications system that provides price quotations and order execution for fourth market participants.
Interest-Rate Parity
An explanation for why spot and futures exchange rates differ. It asserts that such differences result from different interest rates in the two countries.
Interest-Rate Risk
The uncertainty in the return on a fixed-income security caused by unanticipated fluctuations in the value of the asset owing to changes in interest rates.
Interest Rate Swap
A contract between two counterparties wherein one pays the other a fixed stream of cash flows and in return receives a varying stream whose cash flows are regularly reset on the basis of the level of a given market-determined interest rate.
Intermarket Spread Swap
A type of bond swap whereby an investor moves out of one market segment and into another because the investor believes that one segment is significantly underpriced relative to the other.
Intermarket Trading System
An electronic communications network that links the national and regional organized security exchanges and certain over-the-counter dealers. The net-work provides market-maker price quotes and allows participating brokers and dealers to route orders to market-makers offering the best prices.
Internal Rate of Return (alternatively. Implied Return)
The discount rate that equates the sum of the present value of future cash flows expected to be received from a particular investment to the cost of that investment.
Internalization
A form of preferencing whereby broker-dealers who are members of the New York Stock Exchange take their customers' orders and fill them internally instead of sending them to an exchange floor for execution.
Internally Efficient Market
A market for securities in which brokers and dealers compete fairly so that the cost of transacting is low and the speed of transacting is high.
In the Money
In the case of a call option, an option whose exercise price is less than the current market price of its underlying asset. In the case of a put option, an option whose exercise price is greater than the current market price of its underlying asset.
Intrinsic Value of an Option
The value of an option if it were exercised immediately. Equivalently, the market price of the asset upon which a call option is written less the exercise price of the option (or the exercise price less the market price of the asset, in the case of a put option).
Investment
The sacrifice of certain present value for (possibly uncertain) future value. InvestmnentAdviser An individual or organization that provides investment advice to investors.
Investment Analyst
See Financial Analyst.
Investment Banker (alternatively, Underwriter)
An organization that acts as an intermediary between issuers and the ultimate purchasers of securities in the primary security market.
Investment Banking
The process of analyzing and selecting a means of procuring financing on behalf of an issuer of securities.
Investment
Committee In a traditional investment organization, a group of senior management responsible fin- establishing the organization's broad investment strategy.
Investment Company
A type of financial intermediary that obtains money from investors and uses that money to purchase financial assets. In return, the investors receive shares in the investment company and thus indirectly own a proportion of the financial assets that the company itself owns.
Investment Environment
The financial structure in which investors operate, consisting of the kinds of marketable securities available for purchase or sale and how and where those securities are bought and sold.
Investment-Grade Bonds
Bonds that possess bond ratings that permit them to be purchased by the vast majority of institutional investors, particularly regulated financial institutions. Usually, investment-grade bonds have a BBB (Standard & Poor's) or Baa (Moody's) or higher bond rating.
Investment Policy
A component of the investment process that involves determining an investor's objectives, particularly as regards his or her attitude toward the tradeoff between expected return and risk.
Investment Process
The set of procedures by which an investor decides what marketable securities to invest in, how extensive those investments should be, and when the investments should be made.
Questions
Answers
Investment Style
The method an investor uses to take active positions in certain types of securities.
Investment Value
The present value of a security's future prospects as estimated by well-informed market participants.
January Effect
An empirical regularity whereby stock returns appear to be higher in January than in other months of the year.
Junk Bonds
See Speculative-Grade Bonds.
Keogh Plan
A tax-advantaged means by which people who are self-employed (or otherwise have no access to an employer-sponsored retirement plan) can set aside income on a before-tax basis and invest tax-free until the original funds and subsequent earnings are withdrawn.
Lagging Indicators
Economic variables that have been found to follow movements in the economy.
Lambda
The expected return premium (above the riskfree rate of interest) per unit of sensitivity to a particular common factor. Also, the sensitivity of the price of an option to changes in its volatility
Leading Indicators
Economic variables that have been found to signal future changes in the economy.
Letter Stock (alternatively, Restricted Stock)
Stock that is unregistered and sold directly to the purchaser, rather than through a public offering. Such stock must be held at least one year and cannot be sold even at that time unless certain information on the company is available and the amount sold is a relatively small percentage of the total shares outstanding.
Leveraged Buyout
A situation in which a private investment group, using substantial amounts of debt financing, buys all of the shares of a publicly held firm, thereby gaining complete control of the firm.
Limited Liability
An aspect of the corporate form of organization that prevents common stockholders from losing more than their investment if the corporation should default on its obligations.
Limit Order
A trading order that specifies a limit price at which the broker is to execute the order. The trade will be executed only if the broker can meet or better the limit price.
Limit Order Book (alternatively, Specialist's Book)
The records kept by the specialist identifying the unfilled limit, stop, and stop limit orders that brokers want to execute in a particular security.
Limit Price
The price specified when a limit order is placed with a broker, defining the maximum purchase price or minimum selling price at which the order can be executed.
Liquidity (alternatively, Marketability)
The ability of investors to convert securities to cash at a price similar to the price of the previous trade in the security, assuming that no significant new information has arrived since the previous trade. Equivalently, the ability to sell an asset quickly without having to make a substantial price concession.
Liquidity Preference (Premium) Theory
An explanation of the term structure of interest rates. It holds that the term structure is a result of the preference of investors for short-term securities. Investors can be induced to hold longer-term securities only if they expect to receive a higher return.
Liquidity Premium
The expected incremental return of longer-term securities over shorter-term securities that compensates investors for the greater interest rate risk entailed in holding longer-term securities.
Listed Security
A security that is traded on an organized security exchange.
Load Charge
A sales charge levied by a mutual fund when an investor buys its shares.
Load Fund
A mutual fund that has a load charge.
Local (alternatively, Scalper)
A member of an organized futures exchange who trades for his or her own account and has a very short holding period.
Long Hedger
A hedger who offsets risk by buying futures contracts.
Low-Load Fund
A mutual fund that has a small load charge, usually 3.5% or less.
Maintenance Margin Requirement
The minimum actual margin that a brokerage firm requires investors to keep in their margin accounts.
Majority Voting System (alternatively, Straight Voting System)
In the context of a corporation, a method of voting in which a stockholder is permitted to give any one candidate for the board of directors a maximum number of votes equal to the number of shares owned by that shareholder.
Managed Investment Company
An investment company with a portfolio that may be altered at the discretion of the company's portfolio manager.
Management Buyout
A situation in which the existing management of a publicly owned firm, perhaps joined by an outside investment group, buys all the shares of the existing stockholders, thereby gaining complete control of the firm.
Margin Account
An account maintained by an investor with a brokerage firm in which securities may be purchased by borrowing a portion of the purchase price from the brokerage firm or may be sold short by borrowing the securities from the brokerage firm. Marginal Tax Rate The amount of taxes, expressed as a percentage, paid on each addition al dollar of taxable income received.
Marginal Utility
The extra utility that a person derives from engaging in an extra unit of economic activity such as work, consumption, or investment.
Margin Call
A demand upon an investor by a brokerage firm to increase the equity in the investor's margin account. The margin call is initiated when the investor's actual margin falls below the maintenance margin requirement.
Margin Purchase
The purchase of securities financed by borrowing a portion of the purchase price from a brokerage firm.
Markdown
The difference in prices between what an investor's broker receives and what the investor receives for a security sold in the over-the-counter market.
Marked (or Marking) to the Market
The process of calculating, usually on a daily basis, the actual margin in an investor's account. Equivalently, the process of adjusting the equity in an investor's account to reflect the changes in the market value of the account's as-sets and liabilities.
Marketability
See Liquidity.
Market Beta
See Beta.
Market Capitalization
The aggregate market value of a security, equal to the market price per unit of the security multiplied by the total number of outstanding units of the security.
Market Discount Bond
A bond issued at par, but currently selling that sells in the secondary market at a price below its par value.
Market Discount Function
The set of discount factors on all default-free bonds across the spectrum of terms-to-maturity.
Market Index
A collection of securities whose prices are averaged to reflect the overall in-vestment performance of a particular market for financial assets.
Market-Maker
See Dealer.
Market Model
A simple linear model that expresses the relationship between the return on a security and the return on a market index.
Market Order
A trading order that instructs the broker to buy or sell a security immediately at the best obtainable price.
Market Portfolio
A portfolio consisting of an investment in all securities. The proportion in-vested in each security equals the percentage of the total market capitalization represented by the security.
Market Risk (alternatively, Systematic Risk)
The portion of a security's total risk that is related to moves in the market portfolio and, hence, cannot be diversified away.
Market Segmentation Theory
An explanation of the term structure of interest rates. It holds that various investors and borrowers are restricted by law, preference, or custom to certain maturity ranges. Spot rates in each market segment are determined by supply and demand conditions there.
Market Timing
A form of active management that entails shifting an investor's funds between a surrogate market portfolio and the riskfree asset, depending on the investor's perception of their relative near-term prospects.
Markup
The difference in prices between what an investor pays and what the investor's broker pays for a security purchased in the over-the-counter market.
Maturity Date
The date upon which a bond issuer promises to repay investors the principal of the bond.
May Day
The date (May 1, 1975) that the New York Stock Exchange ended its fixed-commission rate requirement and permitted member firms to negotiate commission rates with customers.
Mean (alternatively, Expected Value)
A measure of central tendency of the probability distribution of a random variable that equals the weighted average of all possible outcomes using their probabilities as weights.
Median
The outcome of a random variable where there is an equal probability of observing a value greater or less than it.
Member Corporation
See Member Firm.
Member Firm (alternatively, Member Corporation or Member Organization)
A brokerage firm with one or more memberships in an organized security exchange.
Member Organization
See Member Firm.
Merger
A form of corporate takeover in which two firms combine their operations and be-come one firm. Mergers are usually negotiated by the management of the two merging corporations.
Minus Tick
A trade in a security made at a price lower than the price of the previous trade in that same security.
Mispriced Security
A security that is trading at a price substantially different from its in-vestment value.
Mode
The outcome of a random variable that has the highest probability of occurring.
Modified Duration
The duration of a bond divided by the quantity I plus the bond's yield. For a 1% change in yields, it measures the percentage change (in the opposite direc tion) of the bond's price.
Money Market Deposit
A short-term fixed income security.
Money Markets
Financial markets in which financial assets with a term to maturity of typically one year or less are traded.
Moral Hazard
A problem in pricing insurance where the likelihood of the insured event's occurring increases after insurance is purchased.
Mortgage Bond
A bond that is secured by the pledge of specific property. In the event of de-fault, bondholders are entitled to obtain the property in question and to sell it to satisfy their claims on the issuer.
M-Squared (M2)
An ex post risk-adjusted measure of portfolio performance that compares a portfolio's average return with what it would have earned if the portfolio had been in-vested with the same degree of total risk as the market portfolio.
Multinational Firm
A corporation that carries on a substantial portion of its business in counties other than the country in which it is domiciled.
Multiple-Growth Model
A type of dividend discount model in which dividends are assumed to grow at different rates over specifically defined time periods.
Municipal Bond
A bond issued by a state or local unit of government.
Mutual Fund
See Open-End Investment Company.
Naked Call Writing
The process of writing a call option on a stock that the option writer does not own.
Naked Put Writing
The process of writing a put option on a stock when the writer does not have sufficient cash (or securities) in his or her brokerage account to purchase the stock.
NASDAQ International
An early morning system for trading NYSE, AMEX, and NASDAQ secu rities through the use of a dealer network.
National Association of Securities Dealers (NASD)
A self-regulatory agency that establishes rules and regulations and monitors the activities of brokers and dealers in the over-the-counter market.
National Association of Securities Dealers Automated Quotations (NASDAQ)
An automated nationwide communications network operated by the NASD that connects dealers and brokers in the over-the-counter market. NASDAQ provides current market-maker bid and asked price quotes to market participants.
National Best Bid or Offer (NBBO)
See Inside Quotes.
National Market System (NASDAQ/NMS)
A segment of the over-the-counter market composed of issues with relatively large trading volumes. More detailed trading information is provided on stocks included in NASDAQ/NMS than on other over-the-counter stocks.
Neglected-Firm Effect
An empirical observation that firms followed by relatively few security analysts have had abnormally high returns.
Net Asset Value
The market value of an investment company's assets, less any liabilities, divided by the number of shares outstanding.
Net Present Value
The present value of future cash flows expected to be received from a particular investment less the cost of that investment.
No-Growth Model
See Zero-Growth Model.
No-Load Fund
A mutual fund that does not have a load charge.
Nominal Return
The percentage change in the value of a financial asset, where the beginning and ending values of the asset are not adjusted for inflation over the time of the investment.
Nonfactor Risk (alternatively, Idiosyncratic Risk)
The portion of a security's total risk that is not related to moves in various common factors and, hence, can be diversified away.
Non-Market Risk
See Unique Risk.
Nonsatiation
A condition whereby investors are assumed to always prefer higher levels of terminal wealth to lower levels of terminal wealth.
Normal Backwardation
A relationship between the futures price of an asset and the expected spot price of the asset on the delivery date of the contract. Normal backwardation states that the futures price should be less than the expected spot price.
Normal Contango
A relationship between the futures price of an asset and the expected spot price of the asset on the delivery date of the contract. Normal contango states that the futures price should be greater than the expected spot price.
Normal Distribution
A symmetric bell-shaped probability distribution, completely described by its mean and standard deviation.
Normative Economics
A form of economic analysis that is prescriptive in nature, dealing with what "ought to be."
Odd Lot
An amount of stock that is less than the standard unit of trading, generally from 1 to 99 shares.
Offer Price
See Asked Price.
On-the-Run Issue
The most recently issued Treasury security of a particular maturity.
Open
See Opening Price.
Open-End Investment Company (alternatively, Mutual Fund)
A managed investment company, with an unlimited life, that stands ready at all times to purchase its shares from its owners and usually will continuously offer new shares to the public.
Opening Price (alternatively, Open)
The price at which the first trade of the day took place in a particular stock.
Open Interest
The number of a particular futures contract that are outstanding at a particular point in time.
Open Order (alternatively, Good-Till-Canceled Order)
A trading order that remains in effect until it is either filled or canceled by the investor.
Operating Expense Ratio
The percentage of an investment company's assets that were used to pay for management fees, administrative expenses, and other operating expenses in a given year.
Opportunity Set
See Feasible Set.
Optimal Portfolio
The feasible portfolio that offers an investor the maximum level of satisfaction. This portfolio represents the tangency between the efficient set and an indifference curve of the investor.
Option
A contract between two investors in which one investor grants the other the right to buy (or sell) a specific asset at a specific price within a specific time period.
Option on Futures
See Futures Option.
Order Book Officials
The people who keep the limit order book in those option markets that involve market-makers instead of specialists.
Order Specification
The investor's instructions to a broker regarding the particular characteristics of a trading order, including the name of the security's issuing firm, whether to buy or sell, order size, maximum time the order is to be outstanding, and the type of order to be used.
Ordinary Least Squares
See Simple Linear Regression.
Organized Exchange
A central physical location where trading of securities is done under a set of rules and regulations.
Original Issue Discount (OID)
Security A bond that was originally issued at a price below its par value.
Out of the Money
In the case of a call option, an option whose exercise price is greater than the market price of its underlying asset. In the case of a put option, an option whose exercise price is less than the market price of its underlying asset.
Out-of-Sample Data (alternatively, Holdout Sample)
In the context of constructing a security valuation model, information that is obtained from periods different from those used to estimate the valuation model. Out-of-sample data can be used to test the model's validity.
Over-the-Counter Market (OTC Market)
A secondary market for securities distinct from an organized security exchange.
Overmargined (alternatively, Unrestricted)
A situation in which the actual margin in a mar-gin account has risen above the initial margin requirement.
Overpriced Security (alternatively, Overvalued Security)
A security whose expected return is less than its equilibrium expected return. Equivalently, a security with a negative alpha.
Oversubscription Privilege
The opportunity given shareholders who have exercised their rights in a rights offering to buy shares that were not purchased in the offering.
Overvalued Security
See Overpriced Security.
Pac-Man Defense
A strategy used by corporations to ward off hostile takeovers. The targeted company reverses the takeover effort and seeks to acquire the firm making the initial takeover attempt.
Participating Bond
A bond that promises to pay a stated rate of interest to its owner but may also pay additional interest if the issuer's earnings exceed a specified level.
Participation Certificate
A bond that represents an ownership interest in a pool of fixed-income securities. The holders of the certificates receive the interest and principal payments on the pooled securities in proportion to their ownership of the pool.
Par Value of Stock
The nominal value of shares of common stock as legally carried on the books of a corporation.
Par Value of Bond
See Principal.
Passive Investment System (alternatively, Passive Management)
The process of buying and holding a well-diversified portfolio.
Passive Management
See Passive Investment System.
Payment for Order Flow
A form of preferencing whereby a dealer pays cash to a broker in order to receive trades from the broker for execution.
Payout Ratio
The percentage of a firm's earnings paid to shareholders in the form of cash dividends.
Pegging
The process by which investment hankers attempt to stabilize the price of an underwritten security in the secondary market for a period of time after the initial offering date.
Perfect Markets
Security markets in which no impediments to investing exist. These impediments include finite divisibility of securities, taxes, transaction costs, and costly information.
Performance Attribution
The identification of sources of returns for a portfolio or security over a particular evaluation interval of time.
Performance Margin
The initial margin that must be posted by a futures buyer or seller.
Pink Sheets
Written published quotations on over-the-counter stocks that are not listed on NASDAQ.
Plus Tick
See Up Tick.
Poison Pill Defense
A strategy used by corporations to ward off hostile takeovers. The targeted company gives its shareholders certain rights that can be exercised only in the event of a hostile takeover, and that, once exercised, will be extremely onerous to the acquirer.
Political Risk
The uncertainty in the return on a foreign financial asset owing to the possibility that the foreign government might take actions that are detrimental to the investor's financial interests.
Portfolio Construction (alternatively, Security Selection)
A component of the investment process that involves identifying which assets to invest in and determining the proportion of funds to invest in each of the assets.
Portfolio Insurance
An investment strategy designed to earn a minimum rate of return while allowing the investor to benefit substantially from the positive returns generated by an investment in a risky portfolio.
Portfolio Manager
An individual who uses the information provided by fInnancial analysts to construct a portfolio of financial assets.
Portfolio Performance Evaluation
A component of the investment process involving periodic analysis of how a portfolio performed in terms of both returns earned and risk incurred.
Portfolio Revision
A component of the investment process, involving periodically repeating the process of setting investment policy, conducting security analysis, and constructing a portfolio.
Portfolio Turnover Rate
A measure of how much buying and selling occurs in a portfolio over a given period of time.
Positive Economics
A form of economic analysis that is descriptive in nature, dealing with "what is."
Preemptive Rights
When a corporation plans an issuance of new common shares, the right of existing shareholders to purchase the new shares in proportion to the number of shares that they currently own.
Preferencing
A standing arrangement on the part of a broker of taking trade orders from customers and sending those orders for execution to a specific dealer.
Preferred Habitat Theory
An explanation of the term structure of interest rates. Similar to the market segmentation theory, it holds that various investors and borrowers have segments of the market in which they prefer to operate. However, these investors are assumed to be willing to leave their desired maturity segments if there are significant differences in yields between the various segments.
Preferred Stock
A hybrid form of security that has characteristics of both common stocks and bonds.
Premium
The price of an option contract.
Price-Earnings Ratio
A corporation's current stock price divided by its earnings per share.
Price Impact
The effect on the price of a security resulting from a trade in that security. Price impact is the result of several factors, including size of the trade, demand for immediate liquidity, and presumed information of the individual or organization placing the order.
Price-Relative
The price of a security at the end of one period divided by its price at the end of the previous period.
Price-Weighted Market Index
A market index in which the contribution of a security to the value of the index is based solely on the security's current market price.
Primary Market
The market in which securities are sold at the time of their initial issuance.
Principal (alternatively, Face Value or Par Value of Bond)
The nominal value of a bond that is promised to be repaid to bondholders at the maturity date.
Private Placement
The direct sale of a newly issued security to a small number of institutional or high networth investors.
Probabilistic Forecasting
A form of security analysis that begins with a series of economic scenarios, along with their respective probabilities of occurrence. Under each of these scenarios, accompanying projections are made as to the prospects for various industries, companies, and stock prices.
Probability Distribution
A model describing the relative frequency of possible values that a random variable can assume.
Professional Money Manager
An individual or organization that invests funds on behalf of others.
Program Trading
The purchase or sale of a collection of securities as if the collection were one security. Program trades are prominently employed in portfolio insurance and index arbitrage strategies.
Promised Yield-to-Maturity
The yield-to-maturity on a bond calculated on the assumption that all promised cash flows are received on a full and timely basis.
Prospectus
The official selling circular that must be given to purchasers of new securities registered with the Securities and Exchange Commission. The prospectus provides various information about the issuer's business, its financial condition, and the nature of the security being offered.
Proxy
The signing by a shareholder of a power of attorney, thereby authorizing a designated party to cast all of the shareholder's votes on any matter brought up at the corporation's annual meeting.
Proxy Fight
An attempt by dissident shareholders to solicit proxies to vote against corporate incumbents.
Purchasing Group
See Syndicate.
Purchasing-Power Risk
The risk experienced by investors in financial assets owing to uncertainty concerning the impact of inflation on the real returns produced by those financial assets.
Pure-Discount Security (alternatively, Zero-Coupon Security)
A security that promises to make only one payment to its owner at the security's maturity date.
Pure Factor Play
See Pure Factor Portfolio.
Pure Factor Portfolio (alternatively, Pure Factor Play)
A portfolio that possesses a unit sensitivity to one factor and no sensitivity to any other factor and has zero nonfactor risk.
Pure Yield Pickup Swap
A type of bond swap whereby an investor exchanges one bond for another to obtain a higher yield over the long term, with little attention paid to the near-term outlook for the bonds' respective market segments or for the market as a whole.
Putable Bond
A bond that offers the owner the option to present the bond to the issuer in ex-change for cash equal to the bond's face value during a time period stated in the indenture.
Put-Call Parity
The relationship between the market price of a put and a call that have the same exercise price, expiration date, and underlying stock.
Put Option
A contract that gives the buyer the right to sell a specific number of shares of a company to the writer at a specific price within a specific time period.
Random Diversification
The process of creating diversification in a portfolio by randomly selecting securities without regard to the standard deviations and correlations of the securities.
Random Error Term
The difference between the actual value of a random variable and the predicted value based on some model.
Random Variable
A variable that takes on alternative values according to chance.
Random Walk (or Random Walk Model)
In general, a situation in which changes in the value of a random variable are independent and identically distributed. When applied to common stocks, it refers to a situation in which security price changes are independent and identically distributed, meaning that the size of a security's price change from one period to the next can be viewed as being determined by the spin of a roulette wheel.
Random Walk with Drift
A situation in which security prices follow a random walk, except that those prices are expected to rise over time.
Rate Anticipation Swap
A type of bond swap whereby an investor exchanges bonds that are expected to perform relatively poorly for those that are expected to perform relatively well, given an anticipated movement in interest rates.
Rate of Return
The percentage change in the value of an investment in a financial asset (or portfolio of financial assets) over a specified time period.
Real Estate Investment Trust (REIT)
An investment fund, similar to an investment company, whose investment objective is to hold primarily real estate–related assets, either through mortgages, construction and development loans, or equity interests.
Real Investment
An investment involving some kind of tangible asset, such as land, equipment, or buildings.
Realized Capital Gain (or Loss)
A capital gain (or loss) on an asset that is recognized, for tax purposes, through the sale or exchange of the asset.
Real Return
The percentage change in the value of an investment in a financial asset, where the beginning and ending values of the asset are adjusted for inflation over the time of the investment.
Redemption Fee
A fee levied by an investment company when an investor sells his or her shares back to the investment company within a specified period of time after the purchase.
Red Herring
A preliminary prospectus that provides much of the information in the final prospectus but is not an offer to sell the security, nor does it display an actual offering price.
Regional Brokerage Firm
An organization offering brokerage services that specializes in trading the securities of companies located in a particular region of the country.
Regional Exchange
An organized exchange that specializes in trading the securities of companies located in a particular region of the country.
Registered Bond
A bond for which the owner is registered with the issuer. The bondholder receives coupon payments directly from the issuer. Ownership changes require notification of the issuer.
Registered Competitive Market-Maker
See Floor Trader.
Registered Representative
See Account Executive.
Registered Trader
See Floor Trader.
Registrar
A designated agent of a corporation responsible for canceling and issuing shares of stock in the corporation as these shares are issued or traded.
Registration Statement
A document filed with the Securities and Exchange Commission prior to initiating a public security offering.
Reinvestment-Rate Risk
The uncertainty in the return on a fixed-income asset caused by unanticipated changes in the interest rate at which cash flows from the asset can be reinvested.
Replacement Cost Accounting
The use of estimated replacement costs instead of historical book-value costs when calculating corporate earnings.
Repo Rate
The rate of interest involved in a repurchase agreement.
Reported Earnings
See Accounting Earnings.
Repurchase Agreement
A type of money market instrument that involves the sale of a financial asset from one investor to another. The investor selling the asset simultaneously agrees to repurchase it from the purchaser on a stated fixture date at a predetermined price, which is higher than the original transaction price.
Repurchase Offer
An offer by the management of a corporation to buy back some of its own stock.
Residual Standard Deviation
See Standard Deviation of the Random Error Term.
Restricted Account
A margin account in which the actual margin has fallen below the ini tial margin requirement but remains above the maintenance margin requirement.
Restricted Stock
See Letter Stock.
Retention Ratio
The percentage of a firm's earnings that are not paid to shareholders but instead are retained by the firm. Equivalently, one minus the payout ratio.
Return on Equity
The earnings of a firm divided by the firm's book value.
Return-Generating Process
A statistical model that describes how the returns on a security are produced.
Revenue Bond
A municipal bond that is backed solely by the revenues from a designated project, authority, or agency or by the proceeds from a specific tax.
Reverse Stock Split
A form of stock split whereby the number of shares is reduced and the par value per share is increased.
Reversing Trade
The purchase or sale of a futures or options contract designed to offset, and thereby cancel, the previous sale or purchase of the same contract.
Reward-to-Variability Ratio
See Sharpe Ratio.
Reward-to-Volatility Ratio (Treynor Ratio)
An ex post risk-adjusted measure of portfolio performance where risk is defined as the market risk of the portfolio. Mathematically, over an evaluation period, it is the excess return of a portfolio divided by the beta of the portfolio.
Right
An option issued to existing shareholders that permits then to buy a specified number of new shares at a designated subscription price. For each shareholder this number is proportional to the number of existing shares currently owned by the shareholder.
Rights Offering
The sale of new stock conducted by offering the stock to existing share holders in proportion to the number of shares owned by each shareholder.
Risk
The uncertainty associated with the end-of-period value of an investment.
Risk-Adjusted Return
The return on an asset or portfolio, modified to explicitly account for the risk to which the asset or portfolio is exposed.
Risk-Averse Investor
An investor who prefers an investment with less risk over one with more risk, assuming that the two investments offer the same expected return.
Riskfree Asset
An asset whose return over a given holding period is certain and known at the beginning of the holding period.
Riskfree Borrowing
The act of borrowing funds that are to be repaid with interest calculated at the riskfree rate.
Riskfree Lending (or Riskfree Investing)
The act of investing in a riskfree asset.
Risk-Neutral Investor
An investor who has no preference between investments with varying levels of risk, assuming that the investments offer the same expected return.
Risk Premium
The difference between the expected yield-to-maturity of a risky bond and the expected yield-to-maturity of a same-maturity default-free bond.
Risk-Seeking Investor
An investor who prefers an investment with more risk over one with less risk, assuming that the two investments offer the same expected return.
Risk Structure
The set of yields-to-maturity among bonds that possess different degrees of default risk but are similar with respect to other attributes.
Risk Tolerance
The tradeoff between risk and expected return demanded by a particular investor.
Round Lot
An amount of stock that is equal to a standard unit of trading, generally 100 shares or a multiple of 100 shares.
R-Squared
See Coefficient of Determination.
Savings
Foregone consumption. Also, the difference between current income and current consumption.
Scalper
See Local.
SEAQ Automated Execution Facility (SAEF)
A small-order execution system, similar to the Small Order Execution System of NASDAQ, that is used on the London Stock Exchange.
Seat
The designation of membership in an organized exchange. By holding a seat, the member has the privilege of being able to execute trades using the facilities provided by the exchange.
Secondary Distribution
A means of selling a block of stock whereby the shares are sold away from an organized exchange after the close of trading in a manner similar to the sale of new issues of common stock.
Secondary Market
The market in which securities are traded that have been issued at some previous point in time.
Sector
In the context of a specific asset class, or collection of financial assets that have common distinguishing financial characteristics.
Sector Factor
A factor that affects the return on securities within a particular sector.
Sector-Factor Model
A special kind of multiple-factor model in which some of the factors are particular industries or economic sectors.
Sector Selection
A component of the security selection process involving the identification of desirable combinations of sectors within an asset class.
Securities and Exchange Commission (SEC)
A federal agency established by the Securities Exchange Act of 1934 that regulates the issuance of securities in the primary market and the trading of securities in the secondary market.
Securities Investor Protection Corporation (SIPC)
A quasigovernmental agency that insures the accounts of brokerage firms against loss owing to any of the firms' failure.
Securities Lending
The process of making available securities owned by one investor to an other investor in the form of a loan. The borrower provides collateral to the lender to secure the loan and pays the lender a fee.
Security (alternatively, Financial Asset)
A legal representation of the right to receive future benefits under stated conditions.
Security Analysis
A component of the investment process that involves determining the prospective future benefits of a security, the conditions under which such benefits will be received, and the likelihood that such conditions will occur.
Security Analyst
See Financial Analyst.
Security Market
See Financial Market.
Security Market Line
Derived from the capital asset pricing model, a linear relationship between the expected returns on securities and the risk of those securities, with risk ex-pressed as the security's beta (or equivalently, the security's covariance with the market portfolio).
Security Selection
See Portfolio Construction.
Selectivity
An aspect of security analysis that entails forecasting the price movements of individual securities.
Self-Regulation
A method of governmental regulation whereby the rules and standards of conduct in security markets are set by firms that operate in these markets, subject to the oversight of various federal agencies such as the SEC and CFTC.
Selling Group
A group of investment banking organizations that, as part of a security un•• derwriting, are responsible for selling the security.
Semistrong-Form Market Efficiency
A level of market efficiency in which all relevant publicly available information is fully and immediately reflected in security prices.
Sensitivity
See Factor Loading.
Separation Theorem
A feature of the capital asset pricing model that states that the optimal combination of risky assets for an investor can be determined without any knowledge about the investor's preferences toward risk and return.
Serial Bond
A bond issue with different portions of the issue maturing at different dates.
Settle (or Settlement) Price
The representative price for a futures contract determined during the closing period of the futures exchange.
¶Settlement Date
The date after a security has been traded on which the buyer must deliver cash to the seller and the seller must deliver the security to the buyer.
Sharpe Ratio (alternatively, Reward-to-Variability Ratio)
An ex post risk-adjusted measure of portfolio performance where risk is defined as the standard deviation of the portfolio's returns. Mathematically, over an evaluation period, it is the excess return of a portfolio divided by the standard deviation of the portfolio's returns.
Shelf Registration
Under Securities and Exchange Commission Rule 415, issuers may register securities in advance of their issuance and sell these securities up to a year later.