Glossary

An uncertain quantity or number. e.g. X: monthly return of asset A

Oscillator that is calculated as 100 times the difference between the current price, and the price N days prior to it.

A measurement scale that has all the characteristics of interval scales as well as a true zero point as the origin.

A form of equity investment where shares are sold to make commercial property purchases. These shares are typically publicly traded like common shares in the stock market.  Like common shares, Reits pay regular dividends to the shareholders.  The income to pay the dividends come mainly from the rent earned through the properties, less the costs to maintain and refurbish the ...

Indices that measure returns to real estate. They can be categorised as either an appraisal index, a repeat sales index, or a REIT index.

There are 3 broad approaches that the experts use to value a property. Comparable sales approach The comparable sales approach bases valuation on recent sales of similar properties. Obviously, no 2 properties are exactly the same, so adjustments are made for differences in characteristics, such as age, location, condition, and size. Income approach The income approach encompasses discounted cash flow, ...

The value of goods and services produced, measured at base year prices. See also: Nominal GDP, GDP Deflator

Real return measures the increase in an investor’s purchasing power, that is, how much more goods can the investor purchase at the end of one year due to the increase in the investment value. Real return = (1+Nominal return)/(1+Inflation rate) – 1

The single-period interest rate for a completely risk-free security if no inflation were expected.

In the context of replicating stock index returns, the process of adjusting weights to target weights after price changes have affected the weights of the individual constituent securities. Equal weighted and fundamental weighted indices require periodic rebalancing.

An activity ratio that measures the efficiency of a firm in managing its receivables Receivables turnover = Revenue / Avg Receivable See also: DSO

Factors like high interest rates, a stock market crash, or a strong currency can cause aggregate demand to lower, shifting the curve to the left.  In the short run, the economy produces less, at a lower price level.  This new short-run equilibrium output is less than full employment GDP, which means there is high unemployment in the economy.  We call ...

Type of mortgage loan where the lender has a claim against the borrower if there is a shortfall between the outstanding loan amount and property value. (i.e. lender can take legal action against the borrower to recover the shortfall) Compare: Non-recourse loan

Under the cost model for impairment of PP&E, recoverable amount of an asset is the greater of fair value less any selling costs, or the assets value in use.  Value in use is the present value of the asset’s future cash flow stream.

Percentage of a bond’s value an investor will receive if the issuer defaults. Recovery Rate = 1 – Loss Severity

A type of continuation pattern which represents a pause in an uptrend/downtrend, to be continued when the resistance/support level is breached.

A type of bonds for which ownership is recorded by either name or serial number. Compare: Bearer bonds

Analytical tool to identify relationships between variables. (e.g. a regression analysis could relate a company’s sales to GDP over time, providing insight into whether the company’s business is cyclical)

The RSS represents the amount of variance in the dependent variable that is explained by the independent variable. A higher RSS indicates a better fitting model, as it suggests that the independent variable is having a strong effect on the dependent variable. The RSS represents the explained source of variation in the ANOVA table. The RSS is often used in ...

An emotional bias that occurs when market participants do nothing out of excessive fear that actions could be wrong. They attach undue weight to errors of commission, that is doing something that turns out wrong, and not enough weight to errors of omission, that is not doing something that would have turned out right. One classic example is individuals who ...

A coverage ratio measured by the firm’s ability to acquire long-term assets with operating cash flow. Reinvestment ratio = CFO / Cash paid for long-term assets

One of the 3 sources of returns from investing in a fixed coupon bond. This comes from the reinvestment of coupon/interest into interest-bearing securities to earn interest up to the maturity date of the bond. See also: Reinvestment risk

The possibility that an investor will be unable to reinvest cash flows (e.g. coupon payments) at a rate comparable to their current rate of return. Also applies to callable bonds – when the bonds are redeemed before maturity, investor may not be able to reinvest the amount at the same interest rate. Reinvestment risk has a direct relationship with market interest rates. ...

A type of real estate performance index based on the actual trading prices of REIT shares, similar to equity indices.

REITs are composed of a portfolio of properties and as a result, its valuation depends on the characteristics of the entire portfolio. Value estimates for a REIT can be income-based or asset-based. Income-based Approach The income-based approach is similar to the direct capitalisation approach (see real estate valuation) for a specific property and uses some measure of cash flow (e.g. ...

For data grouped into intervals, the fraction of total observations that are less than the value of the upper limit of a stated interval.

Charting the price of one asset class to that of another. In this example, we can see that gold is the better performing asset in the first half of this period.   We can also see a clear bottom and a clear reversal of the trend from then on, with the S&P 500 outperforming gold from that point.   This ...

Oscillator that is based on the ratio of total price increases to total price decreases over N prior periods, scaled to oscillate between 0 and 100. A high score greater than 70 indicates overbought conditions, a sell signal, while a score less than 30 indicates oversold conditions, a buy signal.  This is a contrarian strategy, that is to buy when ...

A type of real estate performance index based on change in prices of properties with repeat sales. Such indices suffer from a sample selection bias because the properties that sell in each period vary and may not be representative of the market. 

The creation of an asset or portfolio from another asset, portfolio, and/or derivative.

The percentage difference between the market value of security (collateral) and the amount loaned (selling price) in a repurchase agreement. Repo margin = Market value / Selling price – 1

The interest rate on a repurchase agreement. Rate is annualised. Implicit interest rate of repurchase agreement = Holding period return = Repurchase Price/Selling Price – 1 Repo rate = Annualise(Holding period return)

A belief perseverance bias in which people tend to classify new information based on past experiences and classifications. Most people have a form of “classification reflex”, which may or may not be accurate depending on the situation. Examples of representativeness bias include base-rate neglect and sample-size neglect.

A form of collateralized loan where the borrower sells a security to a lender with a commitment to buy it back at a later date at a specified price. In effect, the buyer (lender) is actually lending funds to the seller (borrower) with the security as collateral.  The interest rate implied is called the repo rate. See also: Repo margin

The rate of return required by investors given the risk of the investment in a bond. r = Nominal risk-free rate + Risk premium = Real risk-free rate + Inflation premium + Maturity risk premium + Liquidity premium + Default risk premium See also: Yield-to-maturity

A method of credit enhancement where a separate account is created to accumulate emergency cash to be used if the cash flow is insufficient to service a debt. Reserve accounts can come in 2 forms: a cash reserve fund, and an excess spread account. A cash reserve fund is simply a deposit of cash that can be used to absorb ...

Currencies that national central banks and other monetary authorities hold in significant quantities for international trade and as a foreign reserve. The primary reserve currencies are the US dollar and the Euro. Secondary reserve currencies include the British pound, the Japanese yen, and the Swiss franc.

The requirement for banks to hold reserves in proportion to the size of deposits. See also: Money multiplier

A reasonable price that an asset can be sold for at the end of its useful life.

A price level/range in which sellers sell in anticipation that price will drop back. This can be due to a change in polarity in which a former support level becomes a resistance level.

A company’s cumulative earnings that have not been paid out to shareholders.

Proportion of earnings that a company retains and have the potential to grow the company. Retention rate = 1 – Dividend payout ratio

ROA = Net income / Avg total assets

Return on common equity = (Net income – – Preferred Div) / Avg common equity

ROE = Net income / Avg total equity See also: Book value of equity

Return on total capital = EBIT / (ST Debt + LT Debt + Total Equity)

Under this model, PP&E is reported at fair value less any accumulated depreciation. Changes in fair value are reflected in shareholders’ equity and may be recognised in the income statement in certain circumstances. Note: Not permitted under US GAAP Compare: Cost model, Fair value model (for investment property)

The amount charged for the delivery of goods or services in the ordinary activities of a business over a stated period.

A type of municipal bonds which are issued to finance specific projects, such as airports, toll bridges, hospitals, and power generation facilities. Compare: General obligation bonds

The IASB and FASB issued converged standards for revenue recognition that took effect in 2018. The central principle is that a firm should recognise revenue when it has transferred a good or service to a customer (consistent with accrual accounting principles). The converged standards describes the application of five steps for recognising revenue.

A type of pattern used in technical analysis to predict the end of a trend and a change in direction of the security’s price. Types: Head-and-shoulders pattern, Triple top, Double top

A repurchase agreement viewed from the perspective of the lender. The lender lends money by buying collateral security, sells it back, and earn interest.

Reverse stock splits are the opposite of stock splits where old shares are merged to form fewer new shares. So for instance, a 1-for-2 reverse split in this case would mean that every 2 old shares are merged into 1 new share, effectively halving the total number of outstanding shares to 5. Reverse stock splits have no effect on shareholders’ ...

An economic theory that implies that it makes no difference whether a government finances a deficit by increasing taxes or issuing debt.

Given 2 assets that have the same yield, a risk averse investor will prefer the one with lower risk. To convince a risk averse investor to pick the asset with higher risk, it must have a yield higher than the other so as to compensate the investor for taking on more risk.

The degree of an investor’s willingness to take risk. In finance theory, investors can be either risk averse, risk neutral, or risk seeking.

The infrastructure, process, and analytics needed to support effective risk management in an organisation. At the very top is risk governance where the board committee defines the goals of the organisation and, in turn, decides on its risk tolerance level.  The board may additionally provide guidance on risk budgeting, that is how much or where broad categories of risk should ...

Given 2 assets that have the same yield, a risk neutral investor will be indifferent between the 2..

An extra return expected by investors/lenders for bearing some specified risk. For fixed income, this determines the yield spread of a bond over its benchmark.

Given 2 assets that have the same yield, a risk seeking investor will prefer the one with higher risk.

The underlying principle in derivative pricing based on the theory that arbitrage opportunities cannot exist. For an asset with no cost of carry, its futures/forward contract must return the risk-free interest rate. Futures price = Spot price x (1+Rf)T F0(ST) = S0 x (1+Rf)T

Used in the Binomial model for pricing option contracts to estimate the probability of an up move and down move. U: Size of up move D: Size of down move

Online platforms that provide automated investment advice to retail investors.  Such services may be fully automated or assisted by a human investment advisor. An optimal portfolio allocation is computed based on the client’s financial position, return objectives, risk toleranc, and constraints. Robo-advisory services tend to offer passively managed investments with low fees, low minimum account sizes, and conservative recommendations. The ...

One of the three sources of commodity yields, the yield that a futures investor captures as their long position in a futures contract converges to the spot price. In a backwardation market, the price rolls up to the spot price, so the roll yield is positive. In a contango market, the price rolls down to the spot price, so the roll yield ...

Risk that a company will not be able to sell new commercial paper to replace maturing paper. See also: Backup lines of credit

SFR = (E(Rp) – Rf) / σp E(Rp) : expected return of portfolio Rf: risk-free rate σp: portfolio standard deviation (measure of portfolio risk) Compare: Sharpe ratio