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FINA 4321 Final Exam Terms
Terms in this set (66)
The process of buying and holding a well-diversified portfolio.
A method of measuring the performance of a portfolio during a particular period of time. It is the discount rate that makes the present value of cash flows into and out of the portfolio, as well as the portfolio's ending value, equal to the portfolio's beginning value.
A market index in which the contribution of a security to the value of the index is a function of the security's market capitalization.
An empirical regularity whereby stock returns appear to differ consistently across the spectrum of market capitalization. During extended periods of time, smaller capitalization stocks have outperformed larger capitalization stocks on a risk-adjusted basis.
The percentage change in the value of a financial asset, where the beginning and ending values of the asset are not adjusted for inflation over the time of the investment.
Open-End Investment Companies (Mutual Funds)
A managed investment company with an unlimited life that stands ready at all times to purchase its shares from its owners and usually will continuously offer new shares to the public.
Net Asset Value
The market value of an investment company's assets, less any liabilities, divided by the number of shares outstanding.
Portfolio Turnover Rate
A measure of how much buying and selling occurs in a portfolio during a given period of time.
Front-End Load Charges
The price at which a market-maker is willing to purchase a specified quantity of a particular security.
An amount of stock that is equal to a standard unit of trading, generally 100 shares or a multiple of 100 shares.
A trading order that instructs the broker to buy or sell a security immediately at the best obtainable price.
An account maintained by an investor with a brokerage firm in which securities may be purchased by borrowing a portion of the purchase price from the brokerage firm, or may be sold short by borrowing the securities from the brokerage firm.
The purchase of securities financed by borrowing a portion of the purchase price from a brokerage firm.
Initial Margin Requirement
The minimum percentage of a margin purchase (or short sale) price that must come from the investor's own funds.
Maintenance Margin Requirement
The minimum collateral that a brokerage firm requires investors to keep in their margin accounts.
Efficient Set (Efficient Frontier)
The set of efficient portfolios.
All combinations of portfolios, considered in terms of expected returns and risk, that provide an investor with an equal amount of satisfaction.
Strategic Asset Allocation
A simple linear model that expresses the relationship between the return on a security and the return on a market index.
A situation in which all investors possess the same perceptions with regard to the expected returns, standard deviations, and covariances of securities.
Security Market Line
Derived from the Capital Asset Pricing Model, a linear relationship between the expected returns on securities and the risk of those securities, with risk expressed as the security's beta (or equivalently, the security's covariance with the market portfolio).
The difference between a security's or portfolio's expected return and its equilibrium expected return (which is its fair return, given its riskiness).
A market for securities in which every security's price equals its investment value at all times, implying that a specified set of information is fully and immediately reflected in market prices.
Semistrong-Form Market Efficiency
A level of market efficiency in which all relevant publicly available information is fully and immediately reflected in security prices.
Typically, a stock is characterized as having high earnings-to-price and book-value-to-market-value ratios.
The percentage change in the value of an investment in a financial asset, where the ending value and interim cash flows of the asset are adjusted for inflation during the time of the investment.
The price at which a market-maker is willing to sell a specified quantity of a particular security.
Marking to Market
The daily process of adjusting the equity in an investor's account to reflect the daily changes in the market value of the account's assets and liabilities.
Market (Systematic) Risk
The portion of a security's total risk that is related to moves in the market portfolio and, hence, cannot be diversified away.
Capital Asset Pricing Model (CAPM)
An equilibrium model of asset pricing that states that the expected return on a security is a positive linear function of the security's sensitivity to changes in the market portfolio's return.
A portfolio consisting of an investment in all securities. The proportion invested in each security equals the percentage of the total market capitalization represented by the security.
Sharpe (Reward-to-Variability) Ratio
An ex post risk-adjusted measure of portfolio performance where risk is defined as the standard deviation of the portfolio's returns. Mathematically, during an evaluation period, it is the excess return of a portfolio divided by the standard deviation of the portfolio's returns.
A form of investment management that involves buying and selling financial assets with the objective of earning positive abnormal returns.
A method of measuring the performance of a portfolio during a particular period of time. Effectively, it is the return on one dollar invested in the portfolio at the beginning of the measurement period.
A market index in which the contribution of a security to the value of the index is a function of the security's current market price.
A portfolio against which the investment performance of an investor can be compared for the purpose of determining investment skill. A benchmark portfolio represents a relevant and feasible alternative to the investor's actual portfolio and, in particular, is similar in terms of risk exposure.
A stock that has experienced or is expected to experience rapidly increasing earnings per share and is often characterized as having low earnings-to-price and book-value-to-market-value ratios.
An empirical regularity whereby stock returns have historically been higher in January, on average, than in other months of the year.
The difference between the expected rate of return on common stocks and the risk free return.
Closed-End Investment Companies
A managed investment company, with an unlimited life, that does not stand ready to purchase its own shares from its owners and seldom issues new shares beyond its initial offering.
Operating Expense Ratio
The percentage of an investment company's average assets that used to pay for management fees, administrative expenses, and other operating expenses in a given year.
A mutual fund that does not have a load charge.
An amount of stock that is less than the standard unit of trading, generally from 1 to 99 shares.
A trading order that specifies a limit price at which the broker is to execute the order. The trade will be executed only if the broker can meet or better the limit price.
An arrangement between an investor and a brokerage firm where the investor maintains an account in which the investor's securities are registered in the name of the brokerage firm.
The sale of a security that is not owned by an investor but rather is borrowed from a broker. The investor eventually repays the broker in kind by purchasing the same security in a subsequent transaction.
A situation in which the collateral in a margin account has fallen below the minimum amount determined by maintenance margin requirement.
A demand on an investor by a brokerage firm to increase the collateral or decrease the debit balance in the investor's margin account. The margin call is initiated when the investor's collateral falls below the minimum amount determined by the maintenance margin requirement.
An investor who prefers an investment with less risk over one with more risk, assuming that both investments offer the same expected return.
Certainty Equivalent Return
The return on a risk free investment that makes the investor indifferent between it and a particularly risky investment.
Capital Allocation Line
Tactical Asset Allocation
Unique (Unsystematic) Risk
The portion of a security's total risk that is not related to moves in the market portfolio and, hence, can be diversified away.
Capital Market Line
The set of portfolios obtainable by combining the market portfolio with risk free borrowing or lending. Assuming homogeneous expectations and perfect markets, the Capital Market Line represents the efficient set.
A relative measure of the sensitivity of an asset's return to changes in the return on the market portfolio. Mathematically, the beta coefficient of a security is the security's covariance with the market portfolio divided by the variance of the market portfolio.
Treynor (Reward-to-Volatility) Ratio
An ex post risk-adjusted measure of portfolio performance where risk is defined as the market risk of the portfolio. Mathematically, during an evaluation period, it is the excess return of a portfolio divided by the beta of the portfolio.
Weak-Form Market Efficiency
A level of market efficiency in which all previous security price and volume data are fully and immediately reflected in current security prices.
Strong-Form Market Efficiency
A level of market efficiency in which all relevant information, both public and private, is fully and immediately reflected in security prices.
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