Glossary

The measure is adjusted against the market portfolio.  For example, a portfolio has a return lower than the market returns, but if we project the return based on its Sharpe ratio, the portfolio is actually outperforming the market.  The M2 is the excess return over the market on a risk adjusted basis.  The excess return of the portfolio is the ...

A measure of bond duration calculated as the weighted average of the number of years until each of the bond’s promised cash flows is to be paid. 4 steps to calculate Macaulay duration: Identify all the cash flows Discount to PV using bond’s yield Calculate weights  Sum up weight x num of years

Computer-based techniques that aim to “find the pattern, apply the pattern.” Machine learning algorithms typically have to go through a learning phase where it is given inputs of source training data, and may be given outputs of target training data. The algorithm is designed to learn how to model the output data based on the input data, or to learn ...

The minimum amount that is required by a futures clearinghouse to maintain a margin account. If the balance in the account falls below the maintenance margin, additional funds must be deposited to bring the margin balance back up to the initial margin amount.

A modified form of call provision which reduces the reinvestment risk to the bondholders. With a make-whole bond, the call price is not fixed.   It is based on the present value of the future cash flows the bondholder will not receive. As such, the calculated call price is unlikely to be lower than the market value of the bond.  ...

Actively managed funds which can be focused on specific sectors, or diversified across a number of sectors.   Some are structured as limited partnerships with fees like those of hedge funds and restrictions on the number, net worth, and liquidity of the investors. Others are structured like mutual funds with shares that are publicly traded so that retail investors can ...

A type of leveraged buyout strategy where  an external management team will replace the existing management team to implement the value add measures on the target firm.  Compare: Management buyout

A type of leveraged buyout strategy where the existing management team is involved in the acquisition and will stay to implement the value add measures. Compare: Management buy-in

A fee based on assets under management or committed capital, as applicable. May be calculated on either the beginning-of-period or end-of-period values. See also: Incentive fee, Hedge fund fee structure, Private equity fee structure

Section where the management discusses a variety of issues of concern.

A futures trader is required to maintain this account which is mandated by the clearinghouse. This is to help the clearinghouse achieve its guarantee tat all parties/traders will honour their obligations. Trader is required to deposit an initial margin when a trade is incepted. Changes in the settlement price of the futures contract result in daily gains or losses. They ...

If the percentage of equity in a margin account falls below the maintenance margin requirement, the investor will receive a margin call, a request to bring the equity percentage in the account back up to the maintenance margin percentage. An investor can satisfy this request by depositing additional funds or depositing other unmargined securities that will bring the equity percentage ...

Money borrowed from a broker to purchase securities in a leveraged position.

The cost of producing an additional unit of a good. See also: Marginal revenue

Steps to construct MCC Schedule: Find the break points in the schedule Calculate each of the levels of MCC

Proportion that an individual or business spends for every additional dollar of disposable income.

The additional revenue from selling one more unit, calculated as the change in total revenue divided by the change in quantity sold. See also: Marginal cost

An index weighting method in which the weight of each security is its market cap as a proportion of the total market cap of all the securities in the index. Compare: Price weighting, Equal weighting, Fundamental weighting See also: Float adjusted market cap weighting

The risk of receiving less than market value when selling a bond due to wider bid-ask spreads.  When liquidity is tight, the bid-ask spread increases. This contributes to spread risk. Compare: Credit migration risk

A market order instructs the broker to execute the trade immediately at the best possible price. Compare: Limit order

The total value of a firm’s outstanding equity shares based on market prices. Investors determine the market price based on their perceptions of the firm’s risk and the expectations of future cash flows.  The market value of equity reflects the market’s consensus view of the firm’s future performance. Compare: Book value of equity See also: Price-to-book ratio

Financial assets that are traded in a public market, and whose value can be readily determined. (e.g. Treasury notes, bonds, equity securities)

A type infrastructure investment which trade on exchanges and are pass-through entities similar to REITs, where most of the free cash flow is allocated to the investors.  Typically, the general partner manages the partnership, receives a fee, and holds a small partnership interest. Limited partners own the remaining partnership interest.

The accounting principle that expenses should be recognised in the same period in which the associated revenue is recognised.

An active short-term investment strategy that includes intentional matching of the timing of cash outflows with investment maturities. Compare: Mismatching strategy, Laddering strategy

Process of estimating the market discount rate and price of a bond based on the flat prices of more frequently traded comparable bonds. Another method is to get an estimate of the required yield spread over the benchmark rate using the yield spreads of comparable bonds.

An extra return that compensates investors/lenders for the increased sensitivity of the market value of debt to a change in market interest rates as maturity is extended.

The mean of the absolute values of deviations from the sample mean. MAD = ∑❘X-X̄❘ / N

MSR = RSS / k k: number of parameters The MSR represents the average squared difference between the predicted values and the mean of the dependent variable. A lower MSR indicates a better fitting model, while a higher MSR indicates a poorer fitting model. See also: ANOVA

LEVEL II Mean reversion is a property of a time series where the values tend to move back towards a long-term average or “mean” over time. In autoregressive models, mean reversion is the assumption that the current value of a time series is a linear function of its past values and a white noise term, and that the past values ...

MSE = SSE / (n-k-1) n: number of observations, k: number of parameters The MSE represents the average squared difference between the observed values and the predicted values of the dependent variable. A lower MSE indicates a better fitting model, while a higher MSE indicates a poorer fitting model. See also: ANOVA

A scheme of measuring differences. The four types are: Nominal scale Ordinal scale Interval scale Ratio scale

Middle element in an ordered series. If there are even number of elements, sum up the 2 middle elements and divide by 2.

A corporate bond that is offered continuously to investors by an agent of the issuer. Issuers provide maturity ranges for MTNs they wish to sell, and provide yield quotes for those ranges. Investors interested in purchasing the notes make an offer to the issuer’s agent, specifying the face value and an exact maturity within one of the ranges offered. The ...

An information-processing bias where people view money in different accounts or from different sources differently when making investment decisions. This is in conflict with the idea that investment decisions should be made in the context of the investor’s overall portfolio of assets based on their financial goals and risk tolerance.

A distribution with kurtosis identical to that of the normal distribution.

Debt or preferred shares that carry warrants or conversion features that give investors participation in equity value increases. Warrants give the lender the right to purchase new stocks at a certain price, while the convertibility allows the lender to convert the debt into common stock. Mezzanine financing is one method of debt financing in a leveraged buyout transaction.

In a CDO, the tranche that is of lower seniority (lower credit rating) than the senior tranche. Usually pays a fixed rate of interest. See also: Equity tranche

The minimum standard deviation at each level of portfolio return. Made up of minimum variance portfolios. See also: Efficient frontier

The portfolio with the minimum variance for each given level of expected return. For example, if an investor has a required return of 8%, he would choose a portfolio which has the lowest risk amongst all the other portfolios with expected returns of 8%.  We call these the minimum-variance portfolios, and together at various levels of portfolio returns, they make ...

Portion of a subsidiary’s earnings that should be exclude from the net income of the parent.

An active short-term investment strategy whereby the timing of cash outflows is not matched with investment maturities. Compare: Matching strategy, Laddering strategy

Value that appears most often. Value that is most likely to be sampled.

Approximate percentage change in a bond’s price for a 1% change in yield to maturity. Modified duration = Macaulay duration / (1+YTM) See also: Money duration, Approximate modified duration

Monetarists believe that the Keynesian’s focus on fiscal policy is misplaced.  The Keynesian model fails to consider the long-term harm that can be caused by sustained government budget deficits.  Besides, there may be a lag in  the stimulative effects of fiscal policy.  This may be too slow to prevent an economic crisis from blowing up. Rather than fiscal policy, monetarists ...

Actions taken by a nation’s central bank to affect aggregate output and prices through changes in bank reserves, reserve requirements, or its target interest rate. Compare: Fiscal Policy

The monetary transmission mechanism refers to the ways in which a change in monetary policy, specifically the central bank’s policy rate, affects the price level and inflation. There are four channels through which a change in the policy rate are transmitted to prices. They are transmitted through their effect on market interest rates, asset values, consumer and business confidence, and ...

Approximate absolute change in a bond’s price for a 1% change in yield to maturity. Based on Full Price of Bond Position Money duration =  ModDur x Full price of bond position Per 100 of Par Value Money duration =  ModDur x Full price of bond per 100 of par

 Short-term debt securities, with maturities  ≤1 year. e.g. US T-bills, Commercial paper, Certificate of deposits

One method of expressing yield (annualised), assuming simple interest. Money Market Yield = HPR x (360/t) Compare: Bank Discount Yield, Holding Period Yield, Effective Annual Yield, Bond Equivalent Yield

Describes how a change in reserves is expected to affect the money supply. Money multiplier = 1 / Reserve requirement

The theory that an increase in the money supply leads in the long-run to an increase in the price level, while leaving real variables like output and employment unaffected. See also: Quantity Theory of Money

The internal rate of return on a portfolio, taking account of all cash flows. Compare: HPR, TWRR

The relationship between the spot price (St) of the underlying asset and the option contract’s exercise price (X). For call option: In-the-money: St > X At-the-money: St = X Out-of-the-money: St < X For put option: In-the-money: St < X At-the-money: St = X Out-of-the-money: St > X

Monopolistic competition also has many competing firms and low barriers to entry, but differs from perfect competition in that the products are differentiated. Such differentiation can be in product quality, product features and marketing. The firms compete not just in price, but also in product differentiation.  The demand curve faced by each firm is elastic, but downward sloping. Firms may ...

A monopoly market is characterised by a single seller of a product with no close substitutes, thereby little competition. This fact alone means that the firm faces a downward-sloping demand curve, which is the market demand curve, and has the power to choose the price at which it sells its product.  There can be a few reasons for monopolies.  Firstly, ...

A mathematical technique that generates random variables for modelling risk or uncertainty of a certain system. Compare: Historical simulation

A security created from a mortgage pool, and shares are sold to investors. The principal payments from the mortgage payers get passed through to repay the principal owed to the investors. The interest payment also gets passed through to the investors.  However, not all of it is paid to the investors.  A portion of it go to pay servicing or ...

When an analyst pieces together relevant public information, and/or relevant nonmaterial nonpublic information to make their own private analysis and act on the conclusions.  This is NOT a violation of Standard II(A) of the Code and Standards.

Average of the closing price over n periods.

Oscillator that is the difference between short-term moving average and the long-term moving average. Can be used to indicate overbought or oversold conditions, or identify convergence or divergence with the price trend.

Usually comprise indexes from different countries and are designed to represent multiple stock markets. Such indexes may represent multiple national markets based on geographic regions, economic development groups, or even the entire world.

Income statement that uses multiple subtraction steps to arrive at the net income.   It segregates the operating items from the non-operating items.  The multi-step income statement also shows the gross profit, operating income, income before tax, and income from continuous operations.  This allows an analyst to study the company’s gross profit margins and profits from core operations.  It also ...

To find the number of ways to assign n elements into k categories (order within each category does not matter).

The rule that the joint probability of events A and B equals the probability of A given B times the probability of B. P(AB) = P(A|B) x P(B) If events A and B are independent events, the multiplication rule can be simplified as: P(AB) = P(A) x P(B) See also: Addition rule

A type of non-sovereign bond issued by a state or local government in the United States (e.g. State of California Municipal bonds). Interest payments from municipal bonds are most often exempt from national income taxes, and their default rates are very low relative to corporate bonds. Most municipal bonds can be classified as general obligation bonds or revenue bonds. 

A form of pooled investment vehicle in which investors in the fund each have a pro-rata claim on the income and value of the fund. Can be open-end fund or closed-end fund.

Ratio of mutual funds’ cash to total assets.  During uptrends, fund managers are bullish and want to hold as little cash as possible such that most of its cash are invested.  Conversely, fund managers will want to hold as much cash as possible during a downtrend to limit exposure into risky assets. This indicator is often used in a contrarian ...

A pooled investment in which investors in the fund each have a pro-rata claim on the income and value of the fund. Mutual funds can be open-end mutual fund or closed-end mutual fund.  

Events that cannot happen at the same time. See also: Exhaustive events

In capital budgeting, projects that compete directly with each other, so manager can only choose one. If Projects A and B are mutually exclusive, can choose either A or B, usually the one that is more profitable. If there are several profitable mutually exclusive projects, manager still can only choose one from the group.