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146 Cards in this Set

  • Front
  • Back
Agency Problem
Conflicts of interest between stock holders, bond holders and managers.
Real Assets
Assets such as buildings, land, and equipment
Corporate governance
Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled.
Derivative Securities
A security whose value is dependent on the fundamental values of other securities.
Efficient Markets
The price of securities fully reflect available info. Weak form EMH = stocks price in historical info. Semi Strong EMH = Price in all public info. Strong EMH = Price in all public and private info.
Financial Assets
Assets that are claims to the income generated by real assets -- such as stocks or bonds.
Financial Engineering
Creating and designing securities with custom tailored characteristics.
Investment Banking
Firms specializing in the sale of new securities to the public through underwriting.
Pooling loans for various purposes into standardized securities backed by those loans, which can then be traded like any other security.
Bankers Acceptance
A money market assets consisting of an order to a bank by a customer to pay a sum of money at a future date.
Brokers Call
The interest rate relative to which margin loans are quoted. Also known as the call loan rate. Usually 1% higher than ST T-Bills.
Call Option
The right to buy an asset at a specified exercise price on or before a specified expiration date.
Commercial Paper
Short term debt issued by corporations. > 270 days.
Federal Funds
Funds in a banks reserve account
Futures Contract
obliges traders to purchase or sell an aset at an agreed upon price on a specified future date. Futures differ from forward contracts in their standardization, exchange trading, margin requirements and daily settling.
Rate that most creditworthy banks charge one another for large loans of Eurodollars in the London market.
Put Option
The right to sell an asset at a specified exercise price on or before a specified expiration date.
Repos and Reverses
Short term, often overnight, sales of government securities with an agreement to repurchase the securities at a slightly higher price. A reverse repo is the mirror opposite.
Describes securities purchased with money borrowed from a broker. Current max margin is 50%.
Over the Counter Markets (OTC)
Informal network of brokers who negotiate sales.
Private Placement
Primary offering in which shares are sold directly to a small group of institutional or wealthy investors.
(assets - liabilities) / # shares
Soft dollars
The value of research services provided in exchange for commission business.
Turnover ratio
ratio of trading activity vs the assets of a portfolio
Unit Investment Trust (UIT)
Money invested in a portfolio whose composition is fixed for the life of the fund. Shares are typically sold at a premium above NAV.
Altman Z Score
This model combines five different financial ratios to determine the likelihood of bankruptcy amongst companies.The lower the score, the higher the odds of bankruptcy. Companies with Z-Scores above 3 are considered to be healthy.
Catastrophe Bonds
High yield bonds which is usually insurance linked and meant to raise money in case of a catastrophe. Issuer can have deferred or forgiven debt privledges in the event of losses due to catastrophe.
Horizon Analysis
Forecasting the realized coupon yield over various holding periods or investment horizons
document defining the contract between bond issuer and bond holder.
Preferred Stock
nonvoting shares of a corp which pay an dividends.
Put Bonds
Bond that the holder may choose 1) to exchange for par value at some date, or 2) to extend for a given number of years.
Realized Compound Return
Yield assuming reinvestment into the security at the going market rate.
Sinking Fund
allows for periodic repayment of bond principal rather than one lump sum at the end. Adds an element of safety for the bond holder.
Subordination Clause
A clause in an agreement which states that the current claim on any debts will take priority over any other claim made in the future.
Expectations Hypothesis
Forward rates are unbiased estimates of expected future interest rates.
Liquidity Preference Theory
Forward rates exceed expected future interest rates.
Contingent immunization
A mixed passive-active strategy that immunizes a portfolio if necessary to guarantee a minimum acceptable return but otherwise allows active management.
A measure of the curvature in the relationship between bond prices and bond yields. Positive = curvature opens upward, Negative = opens downward.
Multi period cash flow matching
A measure of the sensitivity of a bonds price to a change in interest rates.
Matching duration of assets and liabilities so as to make net worth unaffected by changes in interest rates.
Interest Rate Swap
Managing interest rate risk by swapping cash flows corresponding to different securities without actually exchanging securities.
Book Value
Net worth of common equity on balance sheet.
Intrinsic Value
Present Value of a firms expected future net cash flows discounted by the required rate of return.
Market Capitalization Rate
Market consensus estimate of appropriate discount rate for a firms cash flows.
Tobin's q ratio
Market value of firm / replacement cost
Continuous Tail Expectation (CTE)
Extension of VaR which better accounts for the entire tail of the upper or lower end of a distribution.
Excess Return
Return in excess of the risk free rate.
Measure of fatness of the tails of a probability distribution. Indicated probability of observing extreme highs or lows.
Lower Partial Standard Deviation (LPSD)
Standard deviation computed using only the portion of the probability distribution below the mean of the variable.
Nominal interest rate
interest rate not adjusted for inflation
Real interest rate
interest rate adjusted for inflation.
Risk Premium
expected return in excess of the risk free rate.
Shape Ratio
Reward to volatility ration. Ratio of portfolio excess return to standard deviation.
Standard Deviation
Square root of the variance. Sheds light on historical volatility.
measure of how extreme a statistical estimate is. The standardized difference between a sample mean and a population mean.
Value at Risk (VaR)
measure of downside risk in the event of an extreme, low probability, price drop.
measures the variability (volatility) from an average.
Certainty equivalent
The certain return providing the same utility as a risky portfolio.
Fair Game
An investment prospect that has a zero risk premium.
Mean - Variance Criterion
Selection of a portfolio that either give you the highest return for a level of variance or the lowest variance for a given level of return.
Risk Averse
will consider risky portfolios only if proved compensation for risk via a risk premium
Risk Neutral
considers risk irrelevant and only looks at the expected return
Risk lover
willing to accept lower expected returns on prospects with higher risk
the statistical measure of how two securities move in relation to each other.
measure of the degree to which two assets move in tandem.
Return in excess of what is predicted by equilibrium models such as CAPM. Value an active manager adds in excess to the benchmark.
Systematic risk of a security. Sensitivity of a security to swings in the broad market.
Regression equation
explains the strength of a relationship between a dependent variable and an independent variable.
Measures the impact of firm specific events during a specific period of time.
Single Index Model
Splits returns into two factors - 1) systematic factors and 2) firm specific factors.
Security Characteristic Line
A plot of the excess return on a security over the risk free rate as a function of excess return on the market.
Expected return = risk free rate + risk premium.

Expected return = Rf + Beta(Rm - Rf)
Market Model
Another version of the market model that breaks down return uncertainty into systematic and non-systematic components.
Market Portfolio
Portfolio where each security is held in proportion to its market value.
Market Price of Risk
Measure of risk premium that investors demand to bear risk. The reward to risk ratio of the market portfolio.
Mutual Fund Theorem
Resulting from CAPM, investors will chose to invest their entire risky portfolio in a market index mutual fund.
Security Market Line
Graphical representation of the expected return-beta relationship of the CAPM.
Abnormal Return
Return on a stock beyond what would be predicted by market movements alone.
Book-to-market effect
Tendency for stocks with high Book-to-market value to generate abnormal returns.
Magnitude issue
Small but significant manager contribution gets lost in the volatility of the market.
Event Study
research methodology designed to measure the impact of an event on interest on stock returns.
Neglected Firm Effect
Investment in lesser known firms have generated abnormal returns.
PE Effect
Low P/E firms have generated better risk adjusted returns than high P/E stocks.
Resistance levels
A price level above which a stock should have trouble rising.
Small Firm Effect
investments in small firms appear to have produced abnormal returns.
Survivorship bias
Bias in the average returns of a sample of funds induced by excluding past returns on funds that left the sample because they were unsuccessful.
Behavioral Finance
Emphasizes impact of psychology on investor behavior.
Confidence Index
Ratio of the yield of tp rated corporate bonds to the yield of intermediate grade bonds.
investors are too slow to update their beliefs in response to new evidence.
Dow Theory
Technical analysis technique that seeks to discern long and short term price trends.
Forecasting Errors
Too much weight is given to recent experience when making forecasts.
Mental Accounting
individuals mentally segregate assets into independent accounts rather than viewing them as part of a unified portfolio.
Prospect Theory
greater utility is given to gains than losses... i.e. the same mutual fund is described as returning 7% over 5 or having above average returns over 10 with a rough patch the last three... the investor would pick the former.
Put-Call Ratio
Ratio put to call options outstanding on a stock.
Regret Avoidance
Investor will have more regret when an unfavorable outcome comes from an unconventional decision. It's why folks follow what's conventional.
Sample Size Neglect
Mistake that a small sample size is adequately representative.
Trin Statistic
average trading volume of losers / average trading volume of winners.
Appraisal Ratio
Signal to noise ratio of an analysts forecasts.The ratio of alpha to residual std dev.
Comparison Universe
Peer group
Information Ratio
Alpha / std dev of diversifiable risk.
Jensen Measure
Portfolio alpha = additional value above CAPM.
M-Square Measure
M squared = rp - rm. Positive linear transformation fo the Sharpe ratio... as such rankings by either measure will always be the same.
Treynor Measure
(rp - rf) / Bp. Like sharpe ratio but uses systemic risk rather than total risk.
Interest rate parity
spot-futures exchange rate relationship that prevails in well functioning markets.
Asian Option
payoffs depend on the average price of the underlying asset during a specific period of time.
Barrier Option
Payoff depends on price at expiration as well as the need to cross through some price barrier.
Collar Strategy
Purchasing an out of the money put while selling an out of the money call.
Currency Translation Option
The underlying asset or exercise price is denominated in a foreign currency.
Digital Options
has fixed payoffs that depend on some condition being met by the price of the underlying asset at expiration.
Foreign currency options
gives the right to buy or sell a specific amount of a foreign currency for a given amount of domestic currency.
Lookback options
Payoff depends in part on the min or max price of the underlying asset during the life of the option. For example, the payoff may be the max price of the asset - exercise price rather than the exercise price of the option.
Option Clearing Corp (OCC)
Acts as intermediary between counter parties to ensure an option transaction gets done.
Protective Puts
Purchase of put and stock to ensure minimum proceeds equal to the put's exercise price.
Put/Call parity theorem
the proper relationship between puts and calls to ensure there are not arbitrage opportunities.
combination of buying both a call and put on the same asset having the same exercise an expiration. The goal is to profit from expected volatility.
An option issued by the firm to purchase shares of the firms stock.
Binomial model
Option valuation model predicated on the assumption that stock prices can move only two values over any short time period.
Black Scholes Option Pricing Model
The equation to value a call option that uses the stock price, exercise price, the risk free interest rate, the time to maturity and standard deviation of the stock return.
same as hedge ratio
The curvature of an option pricing function.
Hedge Ratio
The # of stocks needed to hedge against the price risk of holding one option.
Implied Volatility
the standard deviation of stock returns that is consistent with an options market value.
The difference between the futures price and the spot price.
Option Elasticity
% change in the value of an option accompanying a 1% change in the value of the stock.
Portfolio Insurance
the use of option or hedging strategies to limit downside while maintaining upside.
Time Value
the part of the value of an option that is due to its positive time to expiration.
Basis Risk
Risk attributable to uncertain movements in the spread between a futures price and a spot price.
Calendar Spread
Buy one option and write another with another expiration date.
facilitates transfer of securities resulting from trades.
Futures price must exceed the expected future spot price.
Convergence Property
the convergence of future and spot prices at the maturity of the futures contract.
Cost of Carry Relationship
the correct relationship between spot and futures prices to net out arbitrage opportunities.
Expectations Hypothesis
Theory that forward interest rates are unbiased estates of expected future interest rates.
Forward Contracts
agreement calling for future delivery of a good at an agreed upon price. Less formal than a future contract.
Maintenance Margin
An established value below which a traders margin cannot fall. Reaching triggers a margin call.
Marking to Market
The daily settlement of obligations on futures contracts.
Inverted market. Spot price is higher than futures prices further out on the curve. This is said to occur due to the convenience yield being higher than the prevailing risk free rate.
Open interest
# of futures contracts outstanding
Spot futures parity theorem
Same as cost of carry relationship. Theoretically correct relationship between spot and futures prices ensuring there are no arbitrage opportunities.
Covered interest arbitrage
Same as interest rate parity theorem. the spot futures exchange rate relationship that prevails in a well functioning market.
Cross Hedging
hedging a position in one asset using futures in another commodity.
Foreign Exchange Swap
Exchange of one currency for another on specified dates.
Index arbitrage
Exploits divergence between actual futures prices and their theoretically correct parity values to make a profit.
Interest rate swap
Method to manage interest rate risk by exchanging cash flows on different securities without actually swapping securities.
Price Value of a basis point (PVBP)
= Change in Port value / Predicted change in yield (in bps)