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146 Cards in this Set
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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.


Securitization

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 TBills.


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.


LIBOR

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.


Margin

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.


NAV

(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 ZScores 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


Indenture

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 passiveactive strategy that immunizes a portfolio if necessary to guarantee a minimum acceptable return but otherwise allows active management.


Convexity

A measure of the curvature in the relationship between bond prices and bond yields. Positive = curvature opens upward, Negative = opens downward.


Dedication

Multi period cash flow matching


Duration

A measure of the sensitivity of a bonds price to a change in interest rates.


Immunization

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.


Kurtosis

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.


tstatistic

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.


Variance

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


Correlation

the statistical measure of how two securities move in relation to each other.


Covariance

measure of the degree to which two assets move in tandem.


Alpha

Return in excess of what is predicted by equilibrium models such as CAPM. Value an active manager adds in excess to the benchmark.


Beta

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.


Residuals

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.


CAPM

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 nonsystematic 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 returnbeta relationship of the CAPM.


Abnormal Return

Return on a stock beyond what would be predicted by market movements alone.


Booktomarket effect

Tendency for stocks with high Booktomarket 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.


Conservatism

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.


PutCall 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.


MSquare 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

spotfutures 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.


Straddles

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.


Warrants

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.


Delta

same as hedge ratio


Gamma

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.


Basis

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.


Clearinghouse

facilitates transfer of securities resulting from trades.


Contango

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.


Backwardation

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)
