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FIN 310: Exam 1
Investment
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Commitment of current resources in the expectation of deriving greater resources in the future
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Real Assets
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Assets used to produce goods and services
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Financial Assets
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Claims on real assets or the income generated by them
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Fixed-Income (Debt) Securities
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Pay a specified cash flow over a specific period
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Equity
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An ownership share in a corporation
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Derivative Securities
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Securities providing payoffs that depend on the values of other assets
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Asset Allocation
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Allocation of an investment portfolio across broad asset classes
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Security Selection
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Choice of specific securities within each asset class
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Security Analysis
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Analysis of the value of securities
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Risk-Return Trade-Off
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Assets with higher expected returns entail greater risk
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Passive Management
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Buying and holding a diversified portfolio without attempting to identify mispriced securities
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Active Management
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Attempting to identify mispriced securities or to forecast broad market trends
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Financial Intermediaries
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Institutions that "connect" borrowers and lenders by accepting funds from lenders and loaning funds to borrowers
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Investment Companies
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Firms managing funds for investors. An investment company may manage several mutual funds
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Investment Bankers
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Firm specializing in the sale of new securities to the public, typically by underwriting the issue
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Primary Market
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A market in which new issues of securities are offered to the public
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Secondary Market
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Previously issued securities are traded among investors
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Venture Capital (VC)
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Money invested to finance a new firm
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Private Equity
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Investments in companies that are not traded on a stock exchange
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Securitization
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Pooling loans into standardized securities backed by those loans, which can then be traded like any other security
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Systemic Risk
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Risk of breakdown in the financial system, particularly due to spillover effects from one market into others
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Agency Problems
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Conflicts of interest between managers and stockholders
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Money Markets
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Include short-term, highly liquid, and relatively low-risk debt instruments
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Treasury Bills
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Short-term government securities issued at a discount from face value and returning the face value and returning the face amount at maturity
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Certificate of Deposit
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A bank time deposit
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Commercial Paper
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Short-term unsecured debt issued by large corporations
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Bankers' Acceptance
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An order to a bank by a customer to pay a sum of money at a future date
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Eurodollars
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Dollar-denominated deposits at foreign banks or foreign branches of American banks
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Repurchase Agreement (repos)
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Sort-Term sales of government securities with an agreement to repurchase the securities at a higher price
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Federal Funds
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Funds in the accounts of commercial banks at the Federal Reserve Banks
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LIBOR
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Lending rate among banks in the London market
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Treasury Notes or Bonds
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Debt obligation of the federal government with original maturities of one year or more
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Municipal Bonds
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Tax-exempt bonds issued by state and local governments
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Corporate Bonds
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Long-term debt issue by private corporations typically paying semiannual coupons and returning the face value of the bond at maturity
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Common Stocks
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Ownership shares in a publicly held corporation. Shareholders have voting rights and may receive dividends
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Preferred Stock
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Nonvoting shares in a corporation, usually paying fixed stream of dividends
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Price-Weighted Average
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An average computed by adding the prices of stocks and dividing by a "divisor"
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Market Value-Weighted Index
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Index return equals the weighted average of the returns of each component security , with weights proportional to outstanding market value
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Equally Weighted Index
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An index computed form simple average of returns
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Derivative Asset
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A Security with a payoff that depends on the prices of other securities
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Call Option
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The right to buy an asset at at specified price on or before a specified expiration date
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Put Option
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The right to sell an asset at a specified exercise price on or before a specified expiration date
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Future Contract
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Obliges traders to purchase or sell an asset at an agreed-upon price at at a specified future date
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Primary Market
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Market for new issues of securities
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Secondary Market
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Market for already-existing securities
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Private Placement
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Primary offerings in which shares are sold directly to small group of institutions wealthy investors
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First sale of stock by a formerly private company
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First sale of stock by a formerly private company
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Underwriters
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Underwriters purchase securities from the issuing company and resell them to the public
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Prospectus
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A description of the firm and the security it is issuing
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Dealer Market
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Markets in which traders specializing in particular assets buy and sell for their own accounts
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Auction Market
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A market where all traders meet at one place to buy or sell an asset
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Bid Price
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The Price at which a dealer or other trader is willing to purchase a security
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Ask Price
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The price at which a dealer or other trader will sell a security
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Bid-Ask Price
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The difference between the bid and asked prices
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Limit Buy (Sell) Order
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An order specifying a price at which an investor is willing to buy or sell a security
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Stop-Order
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Trade is not to be executed unless stock hits a price limit
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Over-The-Counter (OTC) Market
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An informal network of broker and dealers who negotiate sales of securities
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NASDAQ Stock Market
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The computer-linked price quotation and trade execution system
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Electronic Communication Networks (ECNs)
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Computer networks that allow direct trading without need for market makers
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Specialist
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A trader who makes a market in the share of one or more firms and who maintain a "fair and orderly market" by dealing personally in the market
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Stock Exchanges
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Secondary markets where already-issued securities are brought and sold members
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Latency
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The time it takes to accept process, and deliver a trading order
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Algorithmic Trading
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The use of computer programs to make rapid trading decisions
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High-Frequency Trading
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A subset of algorithmic trading that relies on computer programs to make very rapid trading decisions
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Blocks
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Large transactions in which at least 10,000 shares of stock are bought or sold
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Dark Pools
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Electronic trading networks where participants can anonymously by or sell large block or securities
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Margin
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Describes securities with money borrowed in part form a broker. the margin is the net worth of the investor's account
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Short Sale
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The sale of shares not owned by the investor but borrowed through broker and later purchased to replace the loan
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Inside Information
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Nonpublic knowledge about a corporation possessed by corporate officers, major owners, or other individuals with privileged access to information about the firm
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Investment Companies
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Financial intermediaries that invest the funds of individual investors in securities or other assets
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Net Asset Value (NAV)
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Assets minus liabilities expressed on a per-share basis
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Unit Investment Trusts
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Money pooled from many investors that is invested in a portfolio fixed for the life of the fund
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Open-End Fund
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A fund that issues or redeems its share at net asset value
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Closed-End Fund
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Shares may not redeemed but instead are traded at prices that can differ fro net asset values
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Load
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A sales commission charged on a mutual fund
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Hedge Fund
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A private investment pool, open to wealthy or institutional investors, that is exempt from SEC regulation and can therefore pursue more speculative polices than mutual funds
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Funds of Funds
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Mutual funds that primarily invest in shares of other mutual funds
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12b-1 Fees
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Annual fees charges by a mutual fund to pay for marketing and distribution costs
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Soft Dollars
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The value of research services that brokerage houses provide "free of charge" in exchange for the investment manager's business
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Turnover
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The ratio of the trading activity of a portfolio to the assets of the portfolio
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Exchange-Traded Funds
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Offshoots of mutual funds that allow investors to trade index portfolios
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Holding -Period Return (HPR)
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Rate of return over a given investment period
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Arithmetic Average
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The sum of returns in each period divided by the number of periods
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Geometric Average
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The single per-period return that gives the same cumulative performance as the sequence of actual returns
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Dollar-Weighted Average Return
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The internal rate of return on an investment
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Scenario Analysis
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Process of devising a list of possible economic scenarios and specifying the likelihood of each once, as well as the HPR that will be realized in each case
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Probability Distribution
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List of possible outcomes with associated probabilities
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Expected Return
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The mean value of the distribution of HPR
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Variance
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The expected value of the squared deviation from the mean
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Standard Deviation
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The square root of the variance
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Value at Risk (VaR)
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Measure of downside risk. The worst loss that will be suffered with a given probability, often 5%
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Kurtosis
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Measure of the fatness of the tails of a probability distribution relative to that of a normal distribution. Indicates likelihood of extreme outcomes
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Skew
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Measure of the asymmetry of a probability distribution
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Risk-Free Rate
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The rate of return that can be earned with certainty
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Risk Premium
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An expected return in excess of that on risk-free securities
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Excess Returns
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Rate of return in excess of the risk-free securities
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Risk Aversion
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Reluctance to accept risk
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Price of Risk
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The ratio of portfolio risk premium to variance
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Sharpe (or reward-to-volatility) Ratio
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Ratio of portfolio risk premium to standard deviation
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Mean-Variance Analysis
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Ranking portfolios by their Sharpe ratios
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Inflation Rate
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The rate at which prices are rising, measured as the rate of increase of the CPI
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Nominal Interest Rate
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The interest rate in terms of nominal (not adjusted for purchasing power) dollars
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Real Interest Rate
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The excess of the interest rate over the inflation rate. the growth rate of purchasing power derived from an investment
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Asset Allocation
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Portfolio choice among broad investment classes
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Capital Allocation
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The choice between risky and risk-free assets
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Complete Portfolio
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The entire portfolio including risky and risk-free assets
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Capital Allocation Line (CAL)
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Plot of risk-return combinations available by varying portfolio allocation between a risk-free asset and risky portfolio
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Passive Strategy
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Investment policy that avoids security analysis
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Capital Market Line
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The capital allocation line using the market index portfolio as the risky asset
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