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162 Cards in this Set

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Arithmetic Mean Return (Ra)
A measure of mean return equal to the sum of annual holding period returns divided by the number of years.
Business Risk
Uncertainty due to the nature of a firm's business that affects the variability of sales and earnings.
Capital Market Line (CML)
The line that reflects the combination of risk and return of different investments.
Coeffeicient of Variation (CV)
A measure of relative variability that indicates risk per unit of return. In general, it is equal to the standard deviation divided by the mean value.
Financial Risk
Uncertainty due to the method by which a firm finances its assets.
Geometric mean Return (Rg)
The nth root of the product of the annual holding period returns for n years, minus 1.
Holding period
The amount of time an investment is owned.
Holding period return (HPR)
The total return from an investment for a given period of time, stated as a percentage.
Liquidity Risk
Uncertainty due to the ability to buy or sell an investment in the secondary market.
Mean or average rate of return
The average of an investment's returns over an extended period of time.
Real risk-free rate (real RFR)
The basic interest rate with no accommodation for inflation or uncertainty; the pure time value of money
Required rate of return
The return that compenstates investors for their time, the expected rate of inflation, and the uncertainty of the return
Return Relative
Equals 1 plus the holding period return.
Risk
the uncertainty that an investment will earn its expected rate of return
Risk premium
The increase over the nominal risk-free rate that investors demand as compensation for an investment's uncertainty
Standard Deviation
a measure of variability equal to the square root of the variance
Systematic risk
the portion of an individual asset's total variance that is attributable to the variability of the total market portfolio
Unsystematic risk
asset-specific risk that deals with the characteristics of a type of asset or security issuer rather than broad economic factors
Variance
a measure of variability equal to the sum of the squares of a return's deviation from the mean, divided by n-1
American Depository Receipts (ADRs)
Certificates of ownership issued by a U.S. bank that represent indirect ownership of a certain number of shares of a specific foreign firm. Shares are held on deposit in a bank in the firm's home country
call option
an option to buy a firm's common stock within a certain period at a specified price called the strike pric
Call provisions
specify when and how a firm can issue a call for bonds outstanding prior to their maturity.
Capital market instrument
a fixed income investment that trates in the secondar market.
Certificate for automobile receivables (CAR)
an asset-backed security backed by pools of loans to an individual for financing an automobile purchase.
Certificate of Deposit (CD)
An instrument issued by banks and S&L's that requires minimum deposits for specified terms and that pays higher rates if interest than savings accounts
collateralized mortgage obligagation (CMO)
A debt security, based on a pool of mortgage loans, that provides a relatively stable stream of payments for a relatively predictable term
collateral trust bond
a mortgage bond wherein the assets backing the bond are financial assets like stocks and bonds
common stock
an equity investment that represents ownership of a firm, with full participation in its success or failure, the firm's directors must approve divident payments
convertible bond
a bond with the added feature that the bondholder has the option to turn the bond back to the firm in exchange for a specified number of common shares of the firm.
Debentures
Bonds that promise payments of interest and principal but pledge no specific assets. Holders have first claim on the issuer's income and unpledged assets
Equipment trust certificates
mortgage bonds that are secured by specific pieces of transportation equipment like boxcars and planes
Eurobond
an international bond denominated in a currency not native to the country in which it is issued.
exchange rate risk
uncertainty due to fluctuating exchange rates when investing in foreign securities
fixed income investments
loans from investors to firms or governments, with contractually mandated payment schedules.
futures contract
an agreement that provides for the future exchange of a particular asset at a specified delivery date in exchange for a specified payment at the time of delivery
general obligation bond (GO)
a municipal bond backed by the full taxing power of the municipality
income bonds
debentures that stipulate interest payments only if the issuer earns the income to make the payments by specified dates
indenture
the legal agreement that lists the obligations of the issuer of a bond to the bondholder including payment schedules, call provisions and sinking funds
international domestic bond
a bond issued by a foreign firm, denominated in the firm's native currency, and sold within its own country
investment company
a firm that sells shares of the company and uses the proceeds to buy stock, bonds, or other financial instruments
money market fund
an investment company that holds portfolios of high quality, short term securtities like t-bills. high liquidity and superior returns make this a good alternative to bank savings accounts.
mortgage bonds
bonds that pledge specific assets such as buildings and equipment. the proceeds from the sale of these assets are used to pay off bondholders in case of bankruptcy.
option
the right to buy or sell a firm's common stock at a specified price for a stated period of time.
preferred stock
an equity investment that stipulates a dividend payment either as a coupon or a stated dollar amount. the firm's board of directors may withhold payments.
put options
an option to sell a firm's common stock within a certain period at a specified price.
real estate investment trust (REIT)
an investment fund that holds portfolios of real estate investment
revenue bond
a municipal bond backed by revenue generated by specific municipal projects.
savings account
a money market security wherein an individual loans money to a bank or credit union through a liquid, low risk, low interest account
Senior (secured) bonds
the most senior bonds in a firm's capital structure. they have a first claim on specific assets of the firm in case of bankruptcy.
subordinated bonds
debentures that, in case of dcefault, entitle holders to claims on the issuer's assets only after the claims of holdders of senior debentures and mortgage bonds are satisfied.
Yankee bond
a bond sold in the United states and denominated in U.S. dollar but issued by a foreign firm or government
zero coupon bond
a bond sold at a discount from par value that promises no interest payment during the life of the bond, only the paument of the par value (principal) at maturity.
Closed-end investment company
an investment company that issues only a limited number of shares, which it does not redeem. Instead, closed end shares are traded in securities markets at prices dertermined by supply and demand.
Investment management company
a company, separate from the investment company, that manages the portfolio and performs administrative functions
load or sales charge
an amount charged to purchase shares in most mutual funds trhat are sold by brokers or other members of a sales force. typical charges range from 4 to 8.5% of the initial investment. the charge is added to the net asset value per share to determine the offering price.
Low-load fund
a mutual fund that imposes a moderate front-end sales charge when the investor buys the fund, tupically about 3-4 percent.
Mutual fund
an investment company that pools money from shareholders and invests it in a variety of securities, including stocks, bonds, and money market securities. a mutual fund ordinatily stands ready to buy back its shares at their current net asset value, which depends on the market value of the fund's portfolio of securitiesat the time. mutual funds generally coninuously offer new shares to investors
Net asset value (NAV)
the market value of an investment company's assets after deducting liabilities, divided by the number of shares outstanding.
no-load fund
a mutual fund that sells its shares at net asset value without adding sales charges
open-end investment company
the more formal name for a mutual fund, which derives from the fac that it continuously offers new shares to investors and redeems them on demand.
prospectus
a booklet that describes a mutual fund and offers its shares for sale. it contains information required by the SEC on such subjects as the fund's invetment objective and policies, services, investment restrictions, officers and directors, procedures for buying and redeeming shares, charges, and financial statements
Variable annuity
a contract under which an annuity is purchased with a fixed amount of money that is converted into a varying number of accumulation unites. at retirement, the annuitant is paid a fixed number of monthly units, which are converted into varying amounts of money. the value of both accumulation and annuity units varies with the performance of a portfolio of equity securities.
accumulation phase
phase in the investment life cycle during which individuals in the early to middle years of their working career attempt to accumulate assets to satisfy short term needs and longer term goals
actuarial rate of return
the discount rate used to find the present value of a defined benefit pension plan's future obligations and thus determine the size of the firm's annual contribution to the plan
asset allocation
the process of deciding how to distribute an investor's wealth among different asset classes for investment purposes
asset class
a collection of securities that have similar characteristics, attributes, and risk return relationship
average tax rate
average portion of income that is paid as taxes; equals the total tax payment divided by the total income
basis (of an asset)
for tax purposes, the cost of an asset.
benchmark portfolio
a comparison standard of risk and assets included in the policy statement and similar to the investor's risk preference and investment needs, which can be used to evaluate the investment performance of the portfolio manager.
capital appreciation
a return objective in which the investor seeks to increase the portfolio value, primarily through capital gains, over time to meet a future need; generally a goal of an investor willing to take on above-average risk to meet a goal
capital preservation
a return objective in which the investor seeks to minimize the risk of loss; generally a goal of the risk averse investor
consolidation phase
phase in the investment life cycle during which individuals who are typically past the midpoint of their career have earnings that exceed expenses and invest them for future retirement or estate planning needs
current income
a return objective in which the investor seeks to generate income rather than capital gaines; generally a goal of an investor who wantes to supplement earnings with income to meet living expenses
defined benefit pension plan
a pension plan that promises to pay retirees a specific income stream that is based on years of service, salary, or both.
defined contribution pension plan
a pension plan in which the size of the employee's and employer's contribution is known but the benefits upon retirement depend on both the contrubutions and the returns earned on them
fiduciary
a person who supervises or oversees the investment portfolio of a third party, such as in a trust account, and makes investment decisions in accordance with the owner's wishes.
gifting phase
phase in the investment life cycle during which individuals use excess assets to financially assist relatives or friends, establish charitable trusts, or construct trusts to minimize estate taxes.
liquid
term used to describe an asset that can be quickly converted to cash at a price close to fair market value
marginal tax rate
the portion of each additional dollar in income that is paid as tax
objectives
the investor's goals, expressed in terms of risk and return, included in the policy statement
overfunded plan
a defined benefit pension plan in which the present value of the pensino liabilities is less than the plan's assets
policy statement
a statement in which the investor specifies investment goals, constraints, and risk preferences.
realized capital gains
capital gains that result when an appreciated asset has been sold; realized capital gains are taxable.
spending phase
phase in the investment life cycle during which individuals' earning years end as they retire. they pay for expenses with income from social security and prior investments and invest to protect against inflation.
total return
a return objective in which the investor wantes to increase the portfolio value to meet a future need by both capital gains and current income reinvestment
underfunded plan
a defined benefit pension plan in which the present value of the funds liabilities to employees exceeds the value of the fund's assets.
unrealized capital gains
capital gains that reflect the price appreciation of currently held assets; taxes on unrealized capital gains can be diferred indefinitely
Alternative Trading System
A nontraditional, computerized trading system that competes with or supplements dealer markets and traditional stock exchanges. While they facilitate trading in shares, they do not provide listing services.
Call market
a market in which trading for individual stocks only takes place at specified times. all the bids and asks available at the time are combined and the market administrators specify a single price that will possibly clear the market at that time.
Commission broker
an employee of a member firm who buys or sells for the customers of the firm.
Computer assisted execution system (CAES)
a service created by nasdaq that automates order routing and execution for securities listed on domestic stock exchanges and involved in the intermarket trading system (ITS)
consolidated quotation system
an electronic quotation service for issues listed on the NYSE, the AMEX, or regional exchanges and traded on the Nasdaq intermarket.
coninuous market
a market where stocks are priced and traded continuously either by an auction process or by dealers during the time the market is open.
Electronic communication network (ECN)
A computerized trading system that matches buy and sell orders, usually for retail and small institutinoal trading. ECNs act for customers as a broker-they do not buy or sell from their own account
electronic crossing system (ECS)
an electronic trading system that matches large buy and sell orders
external (or informational) efficiency
a market where prices adjust rapidly to the infuion of new information. as a result current security prices fully reflect all available information
floor broker
an independent member of an exchange who acts as a broker for other members
fourth market
direct trading of exchange securities between owners (usually institutions) without any broker intermediation, often via an ATS
initial public offering (IPO)
a new issue by a firm that has no existing public market.
intermarket trading system (ITS)
a computeried system that connects competing exchanges and dealers who trade stocks listed on an exchange. its purpose is to help customers find the best market for these stocks at a point in time.
limit order
an order that lasts for a specified time to buy or sell a security when and if it traes at a specified price.
liquidity
the ability to buy or sell an asset quickly and at a rice that is not substantially different from the prices of prior transactions.
Maintenance margin
the subsequent downside margin required after thepurchase if the stock price declines.
margin
the percent of cash a buyer pays for a security, borrowing the balance from the broker. this introduces leverage, which increases the risk of the transactinol
margin call
if the value of your equity falls below the maintenance margin (currently 25%), you will receive a margin call that requires you to provide more equity to bring the equity up to the 25% requirement
market
the means through which buyers and sellers are brought together to aid in the transfer of goods and/or services
market order
an order to buy or sell a security immediately at the best price available
nasdaq intermarket
a trading system that includes nasdaq market makers and ECNs that quote and trade stockes listed on the NYSE and the AMEX. it involves dealers from the nasdaq market and the intermarket trading system.in many ways, this has become what had been labeled the third market.
national association of securities dealers automated quotation (nasdaq) system
an electronic system for providing bid-ask quotes for securities traded on nasdaq
OTC electronic bulletin board (OTCBB)
a regulated quotation service that displays real-time quotes, last sale prices, and volume information for a specified set of over the counter securities that are not traded on the formal nasdaw market.
price continuity
a feature of a liquid market in which prices change little from one transaction to the next due to the depth of the market
primary market
the market in which newly issued securities are sold by their issuers, who recieve the proceeds.
private placement
a new issue sold directly to a small group of investors, usually institutions
registerd competitive market makers (RCMM)
members of an exchange who are allowed to use their memberships to buy or sell for their own account within the specific trading obligations set down by the exchange. because they are on the floor, the have a better feel for the market and low commissions, but they provide liquidity to the market.
seasoned equity issues
new shares offered by firms that already have stock outstanding
secondary market
the market in which outstanding securities are bought and sold by owners other than the issuers.
SelectNet
an order-routing and trade-execution system for institutional investors (brokers and dealers) that allows communication through the nasdaq system rather than by phone
short sale
the sale of borrowed stock with the intention of repurchasing it later at a lower price and earning the difference
small-order execution system (SOES)
a quotation and execution system for retail investors who place orders with brokers who must honor their prevailing bid-ask for automatic execution up to 1,000 shares.
third market
trading of listed securities on nasdaq
transaction cost
the cost of executing a trade. low costs characterize an internally effiecient market.
treasury bill
a negotiable U.s. government security with a maturity of less than one year that palys no periodic interest but yields the difference between its par value and its discounted purchase price.
treasury bond
a u.s. government security with a maturity of more than ten years tha tpays interest periodically
treasury note
a u.s. government security with maturities of one to ten years that pays interest peridically
price weighted index
an index calculated as an arithmetic mean of the current prices of the sampled securities
security market index
an index created as a statistical measure of the performance of an intire market or segment of a market based on a sample of securities from the market or segment of a market
unweighted index
an index affected equally by the performance of each security in the sample regardless of price or market value. also referred to as an equal-weighted index.
value-weighted index
an index calculated as the total market value of the securities in the sample. market value is equal to the number of shares or bonds outstanding times the market price of the security
correlation coefficient
a standardized measure of the relationship between two series that ranges from -1.00 to +1.00
covariance
a measure of the degree to which two variables, such as rates of return for investment assets, move together over time relative to their individual mean returns
efficent frontier
the curve that defines the set of portfolios with the maximum rate of return for every given level of risk or the minimum risk for a given rate of return
optimal portfolio
the efficient portfolio with the highest utility for a given investor, found by the point of tangency between the efficent frontier and the investor's highest utility curve
Arbitrage pricing theory (APT)
a theory concerned with deriving the expected rates of return on risky assets based on the asset's systematic relationship to several risk factors. this multifactor model is in contrast to the single-factor CAPM
beta
a standardized measure of systematic risk based on an asset's covariance with the market portfolio
capital asset pricing model (CAPM)
a theory concerned with deriving the expected rates of return on risky assets based on the assets systematic risk levels
Capital Market Line (CML)
the line frm the intercept point that represents the risk free rate tangent to the original efficient frontier; it becomes the new effiecient frontier
characteristic line
the regression line of best fit through a scatterplot of rates of return for the individual risky asset and for the market portfolio of risky assets over some time period
completely diversified portfolio
a portfolio in which all unsystematic risk has been eliminated by diversification
estimated rate of return
the rate of return an investor anticipates earning from a specific investment over a particular future holding period
market portfolio
the portfolio that includes all risky assets with relative weights equal to their proportional market values
market risk premium
the amount of return above the risk free rate that investors expect from the market in general as compensation for systematic risk
multifactor model
a risk return framework that considers multiple sources of both macroecondomic and microeconomic risk in deriving the expected rates or return for a risky-asset portfolio.
risk free asset
an asset with returns that exhibit zero varianc
risky asset
an asset with uncertain future returns
separation theorem
the proposition that the investment decision, which involves investing in the market portfolio on the capital market line, is separate from teh financing decisino, which targets a specific point on the CML based on the investor's risk preference.
systematic risk
the variablility of returns that is due to macroeconomic factors that affect all risky assets. because it affects all risky assets, it cannot be eliminated by diversification.
unsystematic risk
risk that is unique to an asset, derived from its particular characteristics. it can be elminated in a diversified portfolio.
abnormal rate of return
the amount by which a security's return differs from the market's expected rate of return based on the market's rate of return and the security's relationship with the market
anomalies
security price relationships that appear to contradict well regarded hypothesis; in this case the efficient market hypothesis
autocorrelation test
a test of the weak form efficient market hypothesis that compares security price changes over time to check for predictable correlation patterns
behavioral finance
a branch of financial economics that considers how psychological traits affect how individuals or groups act as investors
earnings surprise
a company announcement of earnings that differ from analysts' prevailing expectations
efficient capital market
a market in which security prices rapidly reflect all information about securities
expecte rate of return
the return that analysts caluculations suggest a security should provide, based on the markets rate of return during the period and the security's relationship to the market
filter rule
a trading rule that recommends security transactions when price changes exceed a previously determined percentage.
fusion investing
investing with awareness of the dual effects of fundamental value and investor sentiment.
informationally effiecient market
a more technical term for an efficient capital market that emphasizes the rold of information
runs test
a test of th weak form efficient market hypothesis that checks for trends that persist oonger in terms of positive or negative price changes than one would expect for a random series.
semistrong-form efficient market hypothesis
the belief that security prices fully reflect all publicly available information, including information from secirty transactions and company, economic, and poliitical news.
strong-form efficient market hypothesis
the belief that securty prices fully reflect all information from both public and private sources
trading rule
a formula for deciding on current transactions based on historical data
weak-form efficient market hypothesis
the belief that security prices fully reflect all securty market information.