Finance: Investment and Return Definitions

Abandonment Option

• The option to terminate an investment at some future time if financial results disappoint.

Abnormal Return

• The amount by which an asset's actual return differs from its expected return given the market's and asset's risk.

Absolute Dispersion

• The amount of variability present without comparison to any reference point or benchmark.

Accelerated Book Build

• An offering of securities by an investment bank accomplished in only one or two days.

Accounting Profit

• Income as reported on the income statement, following accounting standards, before provisions for income tax expense; also called income before taxes or pretax income.

Accredited Investors

• Investors meeting certain minimum regulatory net worth or other requirements to invest in certain alternative assets.

Accrued Interest

• The amount of interest accumulated from the last coupon payment until the trade settlement date on a fixed-income instrument, paid by the buyer to the seller.

Action Lag

• The delay from policy decisions to implementation.

Active Investment

• An investment approach where the investor seeks to outperform a given benchmark.

Active Return

• The return on a portfolio minus its benchmark's return.

Activist

• An "activist shareholder" secures sufficient equity holdings to seek a position in a company's board and influence corporate policies or direction.

Activity Ratios

• Ratios that measure a company's management of key current assets and working capital over time.

Ad Hoc Committee

• A small group of lenders or bondholders who negotiate with an issuer on debt restructuring and refinancing before the issuer submits a final proposal to the wider group.

Add-On Pricing

• A pricing approach based on high-margin optional features, customizations, and additional content.

Add-On Rate

• The yield or pricing convention for money market instrument quotations, derived from the difference between price and face value, expressed as a percentage of the price, and multiplied by the periodicity of the annual rate.

Agency Costs

• Direct and indirect costs borne by the principal in a principal-agent relationship because of information asymmetries; they include the costs of monitoring the agent and missed opportunities.

Agency RMBS

• Securities created by pooling residential mortgage-backed securities in the United States by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac); these RMBS essentially carry a guarantee with respect to timely payments.

Allocationally Efficient

• A characteristic of a market, financial system, or economy that promotes the allocation of resources to their highest value uses.

All-Or-Nothing (AON) Orders

• An order to trade only if the entire quantity (size) specified can be traded.

Altcoin

• A cryptocurrency other than Bitcoin.

Alternative Data

• Data generated from non-traditional sources such as social media and sensor networks.

Alternative Hypothesis

• The hypothesis accepted when the null hypothesis is rejected.

Alternative Investment Markets

• Markets for investments other than traditional securities like common shares, preferred shares, and fixed income, encompassing real estate, commodities, hedge funds, private equity, and investments requiring specialized due diligence.

Alternative Trading Systems

• Trading venues that function like exchanges but do not exercise regulatory authority over their subscribers except regarding the conduct of their trading systems, also called electronic communications networks or multilateral trading facilities.

American Depository Receipt

• A U.S. dollar-denominated security that trades like a common share on U.S. exchanges.

American Depository Share

• The underlying shares traded in the issuing company's domestic market, forming the basis of American depository receipts.

American Options

• Options that can be exercised at any time from contract inception until maturity.

American-Style

• Designates an option contract that can be exercised anytime up to the option's expiration date.

Amortization

• The process of allocating the cost of intangible long-term assets with a finite useful life to accounting periods, or the allocation of a bond premium or discount over the remaining periods until maturity.

Amortizing Debt

• A loan or bond with a payment schedule for periodic interest and principal payments.

Analysis of Variance (ANOVA)

• Presents the sums of squares, degrees of freedom, mean squares, and F-statistic for a regression model.

Analytical Duration

• Estimates duration using mathematical formulas and assumes benchmark yields and spreads are independent variables and uncorrelated.

Anchoring and Adjustment Bias

• An information-processing bias where a psychological heuristic influences probability estimation.

Annual General Meeting (AGM)

• Yearly gathering of corporate directors and shareholders, where votes are cast on directors, compensation plans, shareholder resolutions, and other matters; management may also make presentations and hold events.

Anomalies

• Apparent deviations from market efficiency.

Antidilutive

• Refers to a transaction or security which increases earnings per share (EPS) or results in EPS higher than the company's basic EPS, and are not included in the calculation of diluted EPS.

Arbitrage

• Simultaneously purchasing an undervalued asset or portfolio while selling an overvalued but equivalent asset or portfolio to obtain a riskless profit from the price differential, thus capitalizing on market inefficiencies without risk or capital commitment.

Arbitrageurs

• Traders who engage in arbitrage.

Arithmetic Mean

• The sum of the observations divided by the number of observations.

Artificial Intelligence (AI)

• Computer systems previously requiring human intelligence, capable of identifying complex non-linear relationships using quantitative and statistical methods.

Ask

• The price at which a dealer or trader will sell an asset, qualified by a maximum quantity (ask size).

Ask Size

• The maximum quantity of an asset pertaining to a specific ask price from a trader.

Asset Allocation

• Distributing investment funds among asset classes.

Asset Class

• A group of assets sharing similar characteristics, attributes, and risk-return relationships.

Asset Utilization Ratios

• Measure how efficiently a company performs daily tasks, like receivables collection and inventory management.

Asset-Backed Commercial Paper

• Secured commercial paper issuance, where loans or receivables are sold to a special purpose entity that issues asset-backed commercial paper (ABCP) and makes payments to investors from asset cash flows.

Asset-Backed Securities (ABS)

• Bonds issued by a special purpose entity solely to own assets (loans, receivables, mortgages) and distribute cash flows to ABS investors; mortgage-backed securities (MBS) are ABS for mortgages.

Asset-Backed Token

• A token representing ownership of a physical asset not existing on the blockchain, valued based on the underlying asset.

Asset-Based Valuation Models

• Valuation based on estimates of a company's asset's market value.

Asymmetric Information

• Information asymmetry exists when corporate insiders have more insights into a company's performance and prospects than owners and creditors.

At-The-Money

• The price of the underlying asset equals an option's exercise price with zero intrinsic value.

Auction/Reverse Auction Models

• Pricing models setting prices through bidding, where sellers bid in reverse auctions.

Autarky

• Countries aiming for political self-sufficiency with minimal external trade and finance, where state-owned enterprises control domestic industries.

Automatic Stabilizer

• A countercyclical factor that lessens economic slowdowns and rising unemployment.

Availability Bias

• An information-processing bias using a heuristic approach to estimate outcome probability based on the ease of recalling the outcome.

Available-For-Sale

• Under U.S. GAAP, debt securities are not classified as either held-to-maturity or held-for-trading securities, where the investor is willing to sell but not planning to; they are reported at fair value on the balance sheet and unrealized gains are in other comprehensive income.

Average Revenue (AR)

• Total revenue divided by quantity sold.

Backfill Bias

• Occurs when select hedge funds are added to databases and indexes only after initial success and reported returns, also see survivorship bias.

Backup Line Of Credit

• Credit enhancements provided by a bank to a commercial paper issuer, ensuring sufficient liquidity to repay maturing commercial paper even if new paper issuance is not viable.

Backwardation

• A downward sloping, or inverted, forward curve in a futures market.

Balance Sheet Ratios

• Financial ratios involving only balance sheet items.

Balloon Payment

• Large payment required at maturity to pay a bond's outstanding principal.

Balanced

• Government budgets with spending and revenues (taxes) being equal.

Base Rates

• The reference rate upon which a bank bases lending rates for customers.

Base-Rate Neglect

• A type of representativeness bias where the consideration of the base rate or probability of categorization is inadequate.

Basic EPS

• Calculated by dividing net earnings available to common shareholders by the weighted average of common shares outstanding.

Basis Risk

• The risk that the value of a derivative differs unexpectedly from the value of the underlying asset or exposure.

Basket of Listed Depository Receipts (BLDR)

• An exchange-traded fund that represents a portfolio of depository receipts.

Bayes Formula

• A rule to update event probability given prior probabilities, information, and conditional probabilities relating information to the event.

Bearer Bonds

• Ownership is unrecorded and clearing systems know bond owners.

Behavioral Finance

• Examines psychological variables affecting and distorting investment decision-making processes of investors, analysts, and portfolio managers.

Behind the Market

• Prices specified in orders worse than the best current price, such as limit buy orders with a limit price below the best bid.

Benchmark Spread

• The difference in yield-to-maturity between a bond and its benchmark.

Benchmark

• A bond used to compare against another bond to discern attributes, often a government bond with a similar time-to-maturity.

Best Bid

• The highest bid in the market.

Best Effort Offering

• A security offering using an investment bank, in which the bank promises best efforts to sell the offering but does not guarantee sale of a specific amount.

Best Offer

• The lowest offer (ask price) in the market.

Best-In-Class

• Environmental, social, and governance (ESG) implementation approach identifying top companies within an industry using ESG factors.

Beta

• The sensitivity of an investment or portfolio to overall market movements.

Bid

• The price a dealer or trader will pay for an asset, qualified by quantity.

Bid Size

• The quantity of an asset pertaining to a particular bid price.

Big Data

• Extensive information generated by stock exchanges, companies, governments, electronic devices, social media, sensor networks, and company exhaust.

Bilateralism

• Cooperation conducted between two countries, without multiple partners, on political, economic, financial, or cultural topics.

Bimodal

• A distribution with two most frequently occurring values.

Bitcoin

• A cryptocurrency using blockchain technology, created in 2009.

Bivariate Correlation

• Parametric measurement of the relationship between two variables, also called Pearson's correlation.

Black Swan Risk

• An event that is rare, difficult to predict, yet with a significant enough impact.

Block Brokers

• Brokers (agents) specializing in providing brokerage services for large-size trades.

Blockchain

• A digital ledger that sequences information sequentially, links information together, and secures information using cryptographic methods.

Blue Chip

• Widely held companies with large market capitalization, deemed financially stable, and leaders in their specific industry or local stock market.

Board of Directors

• Selected by a company's shareholders to manage the company, and typically oversees executive management.

Bond Equivalent Yield

• A money market interest rate quoted as a 365-day add-on rate.

Bond Indenture

• A legal document laying out the rights and responsibilities of bond issuers and investors.

Bond Market Vigilantes

• Bond market participants who might reduce demand for long-term bonds and push up their yields.

Bondholders

• Investors in an entity’s securitized debt claims e.g., commercial paper, notes, bonds Common types of bondholders include investment funds and institutional investors.

Bonds

• Contractual agreements between an issuer and bondholders.

Bonus Issue of Shares

• A type of dividend, with a company distributing additional shares of its common stock to shareholders instead of paying cash.

Book Building

• Compiling a list or "book" of indications of interest in an offering involves investment bankers.

Book Value

• The net amount shown for an asset or Book value on the balance sheet; it's also a company's total assets exceeding total liabilities.

Boom

• An expansionary phase where economic growth tests the economy's limits.

Bootstrap

• A resampling method using repeated random sampling with replacement, often through computer simulation, to calculate standard error or create confidence intervals for population parameters.

Bottom-Up Analysis

• Investment selection focusing on company-specific circumstances instead of broad economic cycles or industry analysis.

Box and Whisker Plot

• A graphic displaying data dispersion across quartiles, consisting of a box connected to whiskers.

Breakeven Point

• The price of the underlying where the profit to both counterparties would equal zero.

Bridge Financing

• Interim financing that provides funds until permanent financing can be arranged.

Broker

• An agent executing orders for a client in exchange for a commission.

Broker-Dealer

• Financial intermediary able to function as a principal or agent according to trade type.

Brokered Markets

• Markets where brokers arrange trades among clients.

Brownfield Investments

• Late-stage investments of expanding existing facilities or privatizing public assets; feature shorter investment periods, quick cash flow, and operating history.

Budget Surplus/Deficit

• Results from the differences between government revenue and expenditure over a fixed period.

Bullet Bond

• A bond in which the principal repayment is made entirely at maturity.

Bundling

• A pricing approach of combining multiple products or services to incentivize or require customers to buy them together.

Business Cycles

• Recurrent expansions and contractions that affect broad segments of the economy.

Business Model

• Descriptions of business operations, revenue generation, customer interaction, and pricing.

Businesses

• Organization entities formed and managed for the purpose of providing a return or economic benefits to its investors and owners.

Buyback

• A transaction in which a company buys back its own shares using corporate cash.

Buy-Side Firm

• Investment management company or other investor that uses brokers' and dealers' services.

Cabotage

• Transporting passengers or goods by foreign firms within a sovereign nation, often restricted in specific transportation subsectors.

Call Market

• A market where trades occur at specific times and places.

Call Money Rate

• The interest rate that buyers pay to meet their margin loan obligations.

Call Option

• The right to buy an underlying asset.

Call Period

• The time when the issuer of a callable bond can exercise an option to call.

Call Price

• The price at which an issuer of a callable bond can purchase a bond from investors.

Call Protection Period

• The time when the issuer of a callable bond is not allowed to exercise the call option.

Call Risk

• Uncertain maturity and limited price appreciation of callable bonds.

Callable Bond

• A bond with an embedded call option allows the issuer to buy back the bond at specified prices on predetermined dates.

Cannibalization

• Sales switching from one product to a different product of the same company where the two products are perceived or are effectively substitutes.

Capacity

• The ability of the borrower to make its debt payments on time.

Capital Allocation Line (CAL)

• Expected return and standard deviation combinations available from combining the optimal risky asset portfolio with the risk-free asset.

Capital Allocation

• Organizational process for making capital investment decisions with a term of one year or longer.

Capital Asset Pricing Model (CAPM)

• The equation describing an asset's expected return in linear proportion to market portfolio beta.

Capital Expenditures

• Spending on physical (fixed) capital.

Capital Investments

• Spending on assets or resources with a life more than one year.

Capital Market Expectations (CME)

• Expectations regarding the risk and prospects of various asset classes.

Capital Market Line (CML)

• Line with an intercept point that equals the risk-free rate, represents possible tangency to the efficient frontier through a risk-free asset.

Capital Market Securities

• Fixed-income securities with original maturities extending past one year.

Capital Markets

• Financial markets where securities of longer duration are traded, including bonds and equities.

Capital Restrictions

• Controls placed on foreigners to own domestic assets or on domestic residents to own foreign assets.

Capital Structure

• The composition of debt and equity a company uses to finance operations.

Capital

• Resources, other than reliance on debt, that are available within a company.

Capital-Indexed Bond

• A type of index-linked bond where changes in the index are captured with adjustments to the principal, such as Treasury Inflation Protected Securities.

Capital-Intensive Businesses

• Activities with high capital expenditures relative to sales, high net working capital, or low fixed asset turnover.

Capital-Light Businesses

• Businesses characterized by relatively high fixed asset turnover, relatively low capital expenditures, or relatively low net working capital.

Carried Interest

• A performance fee applied to private market fund investments, based on returns exceeding a specific hurdle rate.

Carrying Amount

• The amount recorded for an asset or liability based on accounting principles.

Carrying value

• The purchase price plus (minus)) the amortized amount of the discount (premium) if the bond is purchased at a price below (above) par value.

Carrying

• The investing and holding of an asset for a period of time.

Cartel

• Participants in collusive agreements openly and expressly made.

Cash Conversation Cycle

• The amount of time between an issuer paying its suppliers and receiving cash from its customers.

Cash Flow Additivity Principle

• Summing up dollar amounts indexed for the matching point in time.

Cash Flow From Operations

• Cash profit in a period from the main business activities, excluding interest and dividends.

Cash Flow Hedge

• Refers to an accounting classification for derivatives used to absorb the fluctuating cash flow of a floating-rate asset or liability, such as foreign exchange, interest rates, and commodities.

Cash Markets

• Markets trading specific assets at current prices referreing back to the spot markets.

Cash Prices

• The prices for trading in cash markets.

Cash Ratio

• The ratio of cash and marketable securities to current liabilities.

Catch-Up Clause

• Limited partner agreement specifying general partner receives 100% of distributions above a prespecified hurdle until the GP receives carried interest percentage, then excess dollars are split accordingly.

CDS Credit Spread

• Reflects the credit spread of a credit default swap (CDS) derivative contract that depends on probability of default (POD) and loss given default (LGD).

Central Bank Digital Currencies (CBDCs)

• Digital bank notes/ coins and digital liabilities issued by a Central Bank.

Central Bank Funds Market

• Market for deposit taking banks to excess reserve at national central bank to borrow money overnight to a year.

Central Bank Fund Rate

• The rate at which Central Bank funds are bought(borrowed) and sold(lent) from overnight to one year.

Central Clearing Mandate

• instituted in 2008 Global Financial Crisis and requires most “over the counter derivatives” to be cleared by a central Counterparty (CCP).

Central Counterparty (CCP)

• An economic entity assumption of Counterparty credit risk between derivatives counterparties and provides for most derivative contracts and settlement.

Central Limit Theorem

• The mean and sum of set independent numbers normally distributed with a finite variance; whatever the distribution is.

Certificate of Deposit (CD)

• An instrument holding a specified amount of funds on deposit within a bank during a specified maturity, is nonnegotiable and negotiable.

Channels

• Sites that allow a company to market its products and services.

Character

• The quality of a debits issuer management.

Checking Accounts

• Bank deposits with nor stated maturity is used for transactions with minimal interest and are considered a demand deposit.

Circuit Breaker

• Brief intermission during intraday trading if the price limit has been met.

Classification cycle

• Variations in the level of economic activity as when measuring volume in terms of GDP.

Clawback

• General partner returns distribution if any incentive fees received funds to limited partners, providing they receive the initial investment.

Clearing Instructions

• instructions indicating how to arrange a final settlement for a trade.

Clearing

• Arrangement between execution, transfers settlements and verification of payments for record participants.

Clearinghouse

• An entity that guarantees to each party performance of an agreement being completed.

Closed-end fund

• investment are found by new investors by getting existing share investors to convert liquidated funds with other investors.

Clustered sampling

• Division of a population into subpopulations drawing with clusters which forms a sample.

Code of ethics

• Communication of an organization’s values that serves as a guide of conduct for community members.

Coefficient of determination (R2)

• The percentage of variation that an independent variable can define; used to measure regression models.

Coefficient of Variation

• The degree of dispersion to the means value as to estimate the variations.

Cognitive cost

• Effort processed when updating information and new beliefs.

Cognitive dissonance

• The mental conflict that results from previously held cognitions with new information.

Cognitive Errors

• Behavioral biases resulting from bad reasoning stemming from memory errors, lack in processing.

Coincident Economic Indicators

• Turning points relating to the overall economy. Used to evaluate the economy’s current state.

Co-investing

• Investor invest directly in the assets and possess co investment and invest parallel to a fund when identified.

Collateral Manager

• Buys and sells obligations and generates sufficient cash to meet CDO bondholder obligations.

Collateral

• Beyond the issuers promise is an underlying guarantee for an amount or debt

Collateralized Bond Obligations (CBOs)

• CDOs back by high yield bonds and market bonds.

Collateralized Debt Obligations (CDOs)

• Are backed by diversified pool more obligations into tranches with cash flow distribution/losses based on waterfalls.

Collateralized Loan Obligations (CLOs)

• Investment vehicle with exposures to leveraged loans into tranches based out into a waterfall exposure.

Collateralized Mortgage Obligations

• Mortgage pass throughs that are structured into redistributed cash flow amongst different traunches.

Commercial Paper (CP)

• Debt obligation for an issuer or short term note unsecured for the amount.

Committed (regular) lines of credit

• Bank commitments in effect for credit or commitment terms that are short term.

Committed capital

• Limited numbers partner agreed to help or provide to certain equity funds for a certain amount.

Commodities

• Form from competing firms creating standard grades depending on regulations.

Commodization

• Process for interchange and decreasing by the eyes of customers

Commodity producers

• Firm for sellers and matters

Commodity swap

• Multi date type between payments based reference prices

Common Market

• Economic integration into productions movements.

Common Shares

• Security type as direct interest in the company

Common Stock

• Known as direct ownership .

Common Size Analysis

• Restatement terms allowed identify items using revenue

Companies

• Entities formed and for benefit to owners

Company research report

• Document presenting the analysis recommendations, competitive industry risks, environmental and investment risks.

Complete markets

• Future based markets that can achieve some payoff.

Concession agreement

• Formal arrangement of terms between grants.

Conditional expected values

• Expected values from states events to consider

Conditional pass throughs covered bonds

• Convert to pass throughs after all bond payments.

Conditional variances

• Variances of one variable

Conditions

• Impacts refinance debts or assistance

Confidence level

• Levels of complementary for significance

Confirmation bias

• Individuals view information

Consensus protocol

• Helps set governance in an algorithm.

Conservatism bias

• Incomplete incorportoration using new informatioin

Constant yield price trajectory

• Time to maturity

Constituent securities

• Individual shares

Contango

• Refers to spot price below for ward price

Contingency provision

• Some action with specific events or circumstances.

Contingency table

• Tables with distribution between discrete variables.

Contingent claim

• Derivate in types whether will settle the claim.

Contingent convertible bonds.

• Bonds that will convert after issues capital

Continuous trading markets.

• Trades arranged between certain markets.

Continuously compounded returns

• Beginning over times.

Contract manufacturers

• Companies used for productions

Contract side

• Amount calculates prices

Contraction risk

• Repayment for mortgages that’s backed by certainty.

Contraction

• Recession or decline.