Term Investment Real Assets Financial Assets Fixed-Income (Debt) Securities Equity Derivative Securities Agency Problems Asset

Allocation Security Selection Security Analysis Risk-Return Trade-off Passive Management Active Management Financial Intermediaries Investment Companies Investment Bankers Primary Market Secondary Market Globalization Pass-Through Securities Securitization` Bundling, Unbundling Financial Engineering

Essentials of Investments: Chapter 1 Definition Commitment of current resources in the expectation of deriving greater resources in the future. Assets used to produce goods and services Claims on real assets or the income generated by them. Pay a specified cash flow over a specific period. An ownership share in a corporation. Securities providing payoffs that depend on the values of other assets. Conflicts of interest between managers and stockholders. Allocation of an investment portfolio across broad asset classes. Choice of specific securities within each asset class. Analysis of the value of securities. Assets with higher expected returns entail greater risk. Buying and holding a diversified portfolio without attempting to identify mispriced securities. Attempting to identify mispriced securities or to forecast broad market trends. Institutions that "connect" borrowers and lenders by accepting funds from lenders and loaning funds to borrowers. Firms managing funds for investors. An investment company may manage several mutual funds. Firms specializing in the sale of new securities to the public, typically by underwriting the issue. A market in which new issues of securities are offered to the public. Previously issued securities are traded among investors. Tendency toward a worldwide investment environment, and the integration of international capital markets. Pools of loans (such as home mortgage loans) sold in one package. Owners of pass-throughs receive all of the principal and interest payments made by the borrowers. Pooling loans into standardized securities backed by those loans, which can then be traded like any other security. Creation of new securites either by combining primitive and derivative securites into one composite hybrid or by separating returns on an asset into classes. The process of creating and designing securities with custom tailored characteristics.

Term Money Markets Treasury Bills Certificate of Deposit Commercial Paper Bankers' Acceptance Eurodollars Repurchase Agreements (Repos) Federal Funds LIBOR Treasurey Notes or Bonds Municipal Bonds Corporate Bonds Common Stocks Preferred Stock Price-Weighted Average Market Value-Weighted Index

Essentials of Investments: Chapter 2 Definition Include short-term, highly liquid, and relatively low-risk debt instruments. Short-term government securities issued at a discount from face value and returning the face amount at maturity. A bank time deposit Short-term unsecured debt issued by large corporations. An order to a bank by a customer to pay a sum of money at a future date. Dollar-denominated deposits at foreign banks or foreign branches of American banks. Short-term sales of government securities with an agreement to repurchase the securities at a higher price. Funds in the accounts of commercial banks at the Federal Reserve Bank. Lending rate among banks in the London market. Debt obligations of the federal government with original maturities of one year or more. Tax-exempt bonds issued by state and local governments. Long-term debt issued by private corporations typically paying semi-annual coupons and returning the face value of the bond at maturity. Ownership shares in a publicly held corporation. Shareholders have voting rights and may receive dividends. Nonvoting shares in a corporation, usually paying a fixed stream of dividends. An average computed by adding the prices of the stocks and dividing by a "divisor." Computed by calculating a weighted average of the returns of each security in the index, with weights proportional to outstanding market value.

Equally Weighted Index An index computed from a simple average of returns. Derivative Asset or Contingent A security with a payoff that depends on the prices of other securities. Claim The right to buy an asset at a specified price on or before a specified expiration Call Option date. The right to sell an asset at a specified exercise price on or before a specified Put Option expiration date. Obliges traders to purchase or sell an asset at an agreed-upon price at a Futures Contract specified future date.

Term Primary Market Secondary Market Initial Public Offering (IPO) Underwriters Prospectus Private Placement Dealer Markets Auction Market Bid Price Ask Price Bid-Ask Spread Limit Buy (Sell) Order Stop Order Over-The-Counter (OTC) Market ECNs Specialist NASDAQ Stock Market Stock Exchange Block Transactions Program Trade Margin Short Sale Inside Information

Essentials of Investments: Chapter 3 Definition Market for new issues of securities Market for already-existing securities First sale of stock by a formerly private company. Underwriters purchase securities from the issuing company and resell them. A description of the firm and the security it is issuing. Primary offerings in which shares are sold directly to a small group of institutional or wealthy investors. Markets in which traders specializing in particular assets buy and sell for their own accounts. A market where all traders meet at one place to buy or sell an asset. The price at which a dealer or other trader is willing to purchase a security The price at which a dealer or other trader will sell a security. The difference between a dealer's bid and asked price. An order specifying a price at which an investor is willing to buy or sell a security. Trade is not to be executed unless stock hits a price limit. An informal network of brokers and dealers who negotiate sales of securities. Computer networks that allow direct trading without the need for market makers. A trader who makes a market int eh shares of one or more firms and who maintains a "fair and orderly market" by dealing personally in the market. The computer-linked priced quotation system for the OTC market. Secondary markets where already-issued securities are bought and sold by members. Large transactions in which at least 10, 000 shares of stock are bought or sold. Coordinated sale or purchase of a portfolio of stocks. Describes securities purchased with money borrowed in part from a broker. The margin is the net worth fo the investor's account. The sale of shares not owned by the investor but borrowed through a broker and later purchased to replace the loan. Nonpublic knowledge about a corporation possessed by corporate officers, major owners, or other individuals with privileged access to information about the firm.

Term Investment Companies Net Asset Value (NAV) Unit Investment Trusts Open-End Fund Closed-End Fund Load Hedge Fund 12B- 1 Fees Soft Dollars Turnover Exchange-Traded Funds

Essentials of Investments: Chapter 4 Definition Financial intermediaries that invest the fudns of individual investors in securities or other assets. Assets minus liabilities expressed on a per-share basis. Money pooled from many investors that is invested in a portfolio fixed for the life of the fund. A fund that issues or redeems its shares at net asset value. Shares may not be redeemed, but instead are traded at prices that can differ from net asset value. A sales commission charged on a mutual fund. A private investment pool, open to wealthy or institutional investors, that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds. Annual fees charged by a mutual fund to pay for marketing and distribution costs. The value of research services brokerage houses provide "free of charge" in exchange for the investment manager's business. The ratio of the trading activity of a portfolio to the assets of the portfolio. Offshoots of mutual funds that allow investors to trade index portfolios.

Term Holding-Period Return Arithmetic Average Geometric Average Dollar-Weighted Average Return Scenario Analysis Probability Distribution Expected Return Variance Standard Deviation Value at Risk (VaR) Kurtosis Skew Risk-Free Rate Risk Premium Excess Return Risk Aversion Sharpe (or Reward-toVolatility) Measure Mean-Variance Analysis Inflation Rate Nominal Interest Rate Real Interest Rate Asset Allocation Complete Portfolio Capital Allocation Line Passive Strategy Capital Market Line

Essentials of Investments: Chapter 5 Definition Rate of return over a given investment period. The sum of returns in each period divided by the number of periods. The single per-period return that gives the same cumulative performance as the sequence of actual returns. The internal rate of return on an investment. Process of devising a list of possible economic scenarios and specifying the likelihood of each one, as well as the HPR that will be realized in each case. List of possible outcomes with associated probabilities. The mean value of the distribution of HPR. The expected value of the squared deviatiion from the mean. The square root of the variance. Measure of downside risk. Loss that will be suffered given an extreme, adverse, price change. Measure of the fatness of the tails of a probability distribution. Indicates likelihood of extreme outcomes. Measure of the asymmetry of a probability distribution The rate of return that can be earned with certainty. An expected return in excess of that on risk-free securities. Rate of return in excess of the risk-free rate. Reluctance to accept risk. Ratio of portfolio risk premium to standard deviation. Ranking portfolios by their Sharpe measures. The rate at which prices are rising, measured as the rate of increase of the CPI. The interest rate in terms of nominal (not adjusted for purchasing power) dollars. The excess of the interest rate over the inflation rate. The growth rate of purchasing power derived from an investment. Portfolio choice among broad investment classes. The entrie portfolio including risky and risk-free assets. Plot of risk-return combinations available by varying portfolio allocation between a risk-free asset and a risk portfolio. Investment policy that avoids security analysis. The capital allocation line using the market index portfolio as the risky asset.

Essentials of Investments: Chapter 6 Term Market Risk, Systematic Risk, Nondiversifiable Risk Unique Risk, FirmSpecific Risk, Nonsystematic Risk, Diversifiable Risk Investment Opportunity Set Optimal Risky Portfolio Efficient Frontier Definition Risk factors common to the whole economy.

Risk that can be eliminated by diversification.

Set of available portfolio risk-return combinations. The best combination of risky assets to be mixed with safe assets to form the complete portfolio. Graph representing a set of portfolios that maximizes expected return at each level of portfolio risk. The property that implies portfolio choice can be separated into two independent tasks: 1. Determination of the optimal risky portfolio, which is a pruely technical problem, and 2.the personal choice of the best mix of the risky portfolio and the riskfree asset. Model that relates stock returns to returns on both a broad market index as well as firm-specific influences. Rate of return in excess of the risk-free rate. The sensitivity of a security's returns to the systematic or market factor.

Separation Property

Index Model

Excess Return Beta Firm-Specific or Residual Component of return variability that is independent of broad market movements. Risk A stock's expected return beyond that included by the broad market; its expected Alpha excess return when the market's excess return is zero. Security Characteristic Plot of a security's excess return as a function of the excess return of the market. Line Information Ratio Ratio of alpha to standard deviation of residual return. The portfolio formed by optimally combining analyzed stocks with perceived non-zero Active Portfolio alpha values.

Essentials of Investments: Chapter 7 Term Capital Asset Pricing Model (CAPM) Market Portfolio Mutual Fund Theorem Expected Return-Beta Relationship Security Market Line (SML) Alpha Security Characteristic Line (SCL) Multifactor Models Arbitrage Arbitrage Pricing Theory (APT) Well-Diversified Portfolio Factor Portfolio Definition A model that relates the required rate of return for a security to its risk as measured by beta. The portfolio for which each security is held in proportion to its market value. States that all investors desire the same portfolio of risky assets and can be satisfied by a single mutual fund composed of that portfolio. Implication of the CAPM that security risk premiums (expected excess returns) will be proportional to beta. Graphical representation of the expected return- beta relationship of the CAPM. The abnormal rate of return on a security in excess of what would be predicted by an equilibrium model such as the CAPM. A plot of a securit's expected excess return over the risk-free rate as a function of the excess return on the market. Models of security returns positing that returns respond to several systematic factors. Creation of riskless profits made possible by relative mispricing among securities. A theory of risk-return relationships derived from no-arbitrage considerations in large capital markets. A portfolio sufficiently diversified that nonsystematic risk is negligible. A well-diversified portfolio constructed to have a beta of 1.0 on one factor and a beta of zero on any other factor.

Term Book Value Liquidation Value

Essentials of Investments: Chapter 13 Definition The net worth of common equity according to a firm's balance sheet.

Net amount that can be realized by selling the assets of a firm and paying off the debt. Replacement Cost Cost to replace a firm's assets. Tobin's q Ratio of market value of the firm to replacement cost. The present value of a firm's expected future net cash flows discounted Intrinsic Value by the required rate of return. The market-consensus estimate of the appropriate discount rate for a Market Capitalization Rate firm's cash flows. A formula for the intrinsic value of a firm equal to the present value of Dividend Discount Model (DDM) all expected future dividends. A form of the dividend discount model that assumes dividends will grow Constant-Growth DDM at a constant rate. Dividend Payout Ratio Percentage of earnings paid out as dividends. Plowback Ratio or Earnings Retention The proportion of the firm's earnings that is reinvested in the business Ratio (and not paid out as dividends). Present Value of Growth Net present value of a firm's future investments. Opportunities (PVGO) Dividend discount model in which dividend growth is assumed to level Two-Stage DDM off only at some future date. Price-Earnings Multiple The ratio of a stock's price to its earinings per share. PEG Ratio Ratio of P/E multiple to earnings growth rate. The practice of using flexibility in accounting rules to improve the Earnings Management apparent profitability of the firm.

Term Bond Face Value, Par Value Coupon Rate Zero-Coupon Bond Callable Bonds Convertible Bond Put Bond Floating-Rate Bonds Yield to Maturity (YTM) Current Yield Premium Bonds Discount Bonds Realized Compound Return Horizon Analysis Reinvestment Rate Risk Investment Grade Bond Speculative Grade or Junk Bond Indenture Sinking Fund Subordination Clauses Collateral Debenture Default Premium Credit Defualt Swap Yield Curve

Essentials of Investments: Chapter 10 Definition A security that obligates the issuer to make specified payments to the holder over a period of time. The payment to the bondholder at the maturity of the bond. A bond's annual interest payment per dollar of par value. A bond paying no coupons that sells at a discount and provides only a payment of par value at maturity. Bonds that may be repurchased by the issuer at a specified call price during the call period. A bond with an option allowing the bondholder to exchange the bond for a specified number of shares of common stock in the firm. A bond that the holder may choose either to exchange for par value at some date or to extend for a given number of years. Bonds with coupon rates periodically reset according to a specified market rate. The discount rate that makes the present value of a bond's payment s equal to its price. Annual coupon divided by bond price. Bonds selling abover par value. Bonds selling below par value. Compound rate of return on a bond with all coupons reinvested until maturity. Analysis of bond returns over multiyear horizon, based on forecasts of bond's yield to maturity and reinvestment rate of coupons. Uncertainty surrounding the cumulative future value of reinvested bond coupon payments. A bond rated BBB and above by S&P, or Baa and above by Moody's. A bond rated BB or lower by S&P, or Ba or lower by Moody's, or an unrated bond. The document defining the contract between the bond issuer and the bondholder. A bond indenture that calls for the issuer to periodicaly repurchase some proportion of the outstanding bonds prior to maturity. Restrictions on additional borrowing that stipulate that senior bondholders will be paid first in the even of bankruptcy. A specific asset pledged against possible default on a bond. A bond not backed by specific collateral. The increment to promised yield that compensates the investor for default risk. An insurance policy on the default risk of a corporate bond or loan. A graph of yield to maturity as a function of term to maturity.

Term Structure of Interest Rates Expectations Hypothesis Forward Rate Liquidity Preference Theory Liquidity Premium

The realtionship between yields to maturity and terms to maturity across bonds. The theory that yields to maturity are determined solely by expectations of future short-term interest rates. The inferred short-term rate of interest for a future period that makes the expected total return of a long-term bond equal to that of rolling over short-term bonds. The theory that investors demand a risk premium on long-term bonds. The extra expected return demanded by investors as compensation for the greater risk of longer term bonds.

Term

Essentials of Investments: Chapter 11 Definition A measure of the effective maturiy of a bond, defined as the weighted average of the times until each payment, with weights proportional to the present value of the payment. Macaulay'd duration dividend by 1 + yield to maturity. Measures interest rate sensitivity of bond. A strategy to shield net worth from interest rate movements. Realigning the proportions of assets in a portfolio as needed. Matching cash flos from a fixed-income portfolio with those of an obligation. Refers to multiperiod cash flow matching. The curvature of the price-yield relationship of a bond. Exchange of one bond for a bond with similar attributes but more attractively priced. Switching from one segment of the bond market to another. A switch made in response to forecasts of interest rate changes. Moving to higher yield bonds, usually with longer maturities. Swapping two similar bonds to receive a tax benefit. Forecast of bond returns based largely on a prediction of the yield curve at the end of the investment horizon.

Macaulay's Duaration Modified Duration Immunization Rebalancing Cash Flow Matching Dedication Strategy Convexity Substitution Swap Intermarket Spread Swap Rate Anticipation Swap Pure Yield Pickup Swap Tax Swap Horizon Analysis

Term Passive Management Cash Active Management Market Timing Comparison Universe Sharpe Measure M-square (M2)

Essentials of Investments: Chapter 18 Definition Holding a well-diversified portfolio without attempting to search out security mispricing. Shorthand for virtually risk-free money market securities. Attempts to achieve portfolio returns more than commensurate with risk, whether by forecasting broad markets or by identifying mispriced securities. A strategy that moves funds between the risky portfolio and cash, based on forecasts of relative performance. The set portfolio managers with similar investment styles that is used in assessing the relative performance of an individual portfolio manager. Reward-to-volatility ratio; ratio of portfolio excess return to standard deviation.

Return difference between a managed portfolio leveraged to match the volatility of a passive index and the return on that index. Fund of Funds Mutual funds or hedge funds that invest in other funds. Treynor Measure Ratio of portfolio excess return to beta. Information Ratio Ratio of alpha to the standard deviation of diversifiable risk. Jensen Measure The alpha of an investment. Investing in one market where you find positive alpha opportunities, but using Alpha Transfer/Alpha Transport index products both to hedge broad exposure to that market and to establish exposure to a different market. Alpha Capture Bogey Construction of a positive- alpha portfolio with all systematic risk hedged away. The rate of return an investment manager is compared to for performance evaluation.