Term
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Definition
| strategy that exploits divergences b/w actual futures prices and their theoretically correct parity values to make a riskless profit |
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Term
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Definition
| coordinated buy orders and sell orders of entire portfolios, usually w/ the aid of computers, often to achieve index arbitrage objectives |
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Term
| price value of a basis point |
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Definition
| the change in the value of an asset due to a 1 basis point change in its yield to maturity |
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Term
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Definition
| financial statement showing a firm's revenues and expenses during a period; shows net earnings/profit (revenues-expenses) |
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Term
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Definition
| an accounting statement of a firm's financial position at a specified period; "snap shot" at a particular time; shows net worth of the firm (assets- liabilities) |
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Term
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Definition
| financial statement showing a firm's cash receipts and cash payments during a specified period; only transactions in which cash changes hands; includes depreciation (unlike income statement); separated into operating, investing, and financing activities |
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Term
| profit margin or return on sales |
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Definition
| ratio of operating profits per dollar of sales (EBIT/sales); part of dupont system |
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Term
total asset turnover
(ATO) |
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Definition
| annual sales generated by each dollar of assets (sales/assets); part of dupont system |
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Term
| interest coverage ratio or times interest earned |
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Definition
| a financial leverage measure arrived at by dividing earnings before interest and taxes by interest expense (EBIT/interest expense) |
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Term
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Definition
| measure of debt to total capitalization of a firm |
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Term
| fixed asset turnover ratio |
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Definition
| sales/fixed assets; measures sales per dollar of the firm's money tied up in fixed assets |
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Term
inventory turnover ratio
(a turnover ratio) |
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Definition
| COGS/average inventory; measures speed w/ which inventory is turned over |
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Term
average collection period; days receivables
(a turnover ratio) |
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Definition
| A/R per dollar of daily sales; number of days' worth of sales tied up in A/R; lag b/w date of sale and date payment is received |
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Term
cash ratio
(a liquidity ratio) |
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Definition
| ratio of cash and marketable securities to current liabilities |
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Term
current ratio
(a liquidity ratio) |
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Definition
| current assets/current liabilities; measures ability of firm to pay off its current liabilities by liquidating its current assets; to avoid insolvency |
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Term
quick ratio; acid test ratio
(a liquidity ratio) |
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Definition
| similar to current ratio except excludes inventories |
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Term
market-to-book-value ratio
(a market price ratio) |
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Definition
| market price of a share divided b book value per share |
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Term
price-earnings ratio
(a market price ratio) |
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Definition
| ratio of a stock's price to its earnings per share; P/E multiple |
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Term
Earnings yield
(a market price ratio) |
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Definition
| ratio of earnings to price, E/P |
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Term
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Definition
| net amount you have by selling assets of a firm and paying off all debts |
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Term
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Definition
| cost to replace a firm's assets |
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Term
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Definition
| ratio of market value of the firm to replacement cost; nobel prize winning james tobin |
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Term
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Definition
| present value of future CF's discounted by required rate of return |
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Term
| market capitalization rate |
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Definition
| market-consensus estimate of the appropriate discount rate for a firm's CF's |
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Term
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Definition
| percentage of earnings paid out as dividends |
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Term
| plowback ratio or earnings retention ratio |
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Definition
| proportion of the firm's earnings that is reinvested in the business and not paid out as dividends |
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Term
| present value of growth opportunities (PVGO) |
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Definition
| net present value of a firm's future investments |
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Term
| price-earnings multiple; P/E ratio |
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Definition
| ratio of a stock's price to its earnings per share; side note: riskier stocks have lower P/E multiples; used to value firms and also used to compare similar firms |
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Term
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Definition
| ratio of P/E multiple to earnings growth rate; tests: is the g rate used to compute PEG ratio on the same base, over the same period, and from the same source?!; PEG <1 is a value stock; PEG tells whether co. is over or undervalued; 'cheap'=undervalued and low P/E=cheap |
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Term
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Definition
| practice of using flexibility in accounting rules to improve the apparent profitability of the firm |
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Term
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Definition
| uses forecast of future earnings |
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Term
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Definition
last 4 quarters; most recent historical data;
ttm= trailing twelve months |
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Term
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Definition
| since co's can manipulate earnings, and CF is less prone to manipulation, P/CF sometimes preferred; used in preference over P/E for high capital expenditure co's; (ie: utilities, energy, leverage: taxes) |
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Term
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Definition
| ratio of the market value of equity to the book value of equity (ie: shareholder's equity on the balance sheet) |
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Term
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Definition
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Term
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Definition
| ratio of the market value of equity to the sales; a strong, consistent growth rate is a requirement of a growth company; sales is subject to less manipulation than other financial data; *use when valuing a private company where you can't find current/forecasted earnings but you can get sales info (ie: chic fil a) |
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Term
| foreign exchange swap/currency swap |
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Definition
| exchange a sequence of payments in one currency for payments in another currency at a rate agreed upon today |
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Term
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Definition
| giver the owner (in the long position) the right, but not the obligation, to buy (call) or sell (put) a stock for a specified price (strike/exercise pr) |
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Term
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Definition
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Term
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Definition
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Term
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Definition
| price set for calling (buy) or putting (sell) an asset |
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Term
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Definition
| when option expires (normally the 3rd friday of the month) |
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Term
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Definition
exercise is profitable
call: mkt pr > ex pr
put: mkt pr < ex pr |
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Term
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Definition
exercise isn't profitable
call: mkt pr < ex pr
buy: mkt pr > ex pr |
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Term
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Definition
| exercise price and asset/stock price are equal |
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Term
| Option Clearing Corporation (OCC) |
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Definition
| jointly owned by exchanges on which options are traded; 3rd party that gaurantees contract performance |
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Term
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Definition
| owner can exercise call/put any time before expiration, so normally more valuable; most options are american options |
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Term
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Definition
| option can only be exercised at expiration date; so you can value them |
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Term
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Definition
| purchase price of an option; small % of the cost of the asset; option buyer pays the cost and option writer receives the cost at the time of the sale |
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Term
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Definition
| call/put is based on stock market indexes like NYSE/S&P 500; cash settlement procedure used |
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Term
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Definition
S&P 100 contract for options
S&P 500 contract
Dow jones industrials
(3 most actively traded contracts on the CBOE) |
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Term
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Definition
| S&P 500 index for options |
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Term
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Definition
| gives holder the right to buy/sell specified futures contracts using exercise price of options as futures price |
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Term
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Definition
| buy/sell quantity of foreign currency for a specified amount of domestic currency |
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Term
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Definition
| options traded on t-notes/bonds, etc |
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Term
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Definition
| asset combined w/ put option that guarantees minimum proceeds ='s put's exercise price but gives you the right to sell the share for exercise price even if stock price is below that value; like insurance (catastrophe insurance); called a negative put; if not its a protective put |
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Term
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Definition
| writing a call on an asset together w/ bying the asset; purchase of stock and sale of a call on that stock; not much regard for future, care about the now; ideally want stock to do nothing- stay flat |
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Term
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Definition
| combination of a call and put, each w/ same exercise price and expiration date; useful when you think stock will move a lot, but your not sure which way; bad if there's no move in the stock; basically a bet on volatility |
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Term
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Definition
| 2 puts and 1 call on security w/ same exercise price and expiration date |
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Term
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Definition
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Term
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Definition
| combination of 2+ call or put options on same asset w/ differing exercise pr's or expiration dates; call OR put |
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Term
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Definition
| purchase of one option and the simultaneous sale of another w/ a different exercise price |
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Term
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Definition
| sale and purchase of options w/ diff expiration dates |
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Term
bullish spread
bearish spread |
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Definition
buying a call at a lower stock price and writing a call at a higher stock price
bearish- w/ put |
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Term
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Definition
| strategy that brackets the value of a portfolio b/w 2 bounds; collar buys a protective put w/ cash from a written call; has a floor and ceiling on the payoff; appropriate for investing w/ target wealth goal but is unwilling to risk losses beyond a certain level; call AND put |
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Term
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Definition
| strategy for protecting against declines in the stock value |
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Term
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Definition
| downside protection w/ unlimited upside potential |
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Term
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Definition
| agreement to exchange a commodity in the future for a price decided today (futures price) in a forward contract; futures markets formalize foward contracting- set acceptable grade of commodity, delivery date, etc. |
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Term
futures contract
forward contract |
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Definition
daily settling of gains/losses
money doesn't change hands until delivery date |
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Term
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Definition
| trader who commits to purchase the asset (pay), and take delivery; benefits from a price increase |
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Term
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Definition
| trader who delivers the asset and receives the futures price |
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Term
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Definition
| losses and gains to all positions net out to 0 |
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Term
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Definition
| constant set by exchange (ie: 1 contract of pork bellies= 40,000 lb.); multiply by futures price to get money value of contract; then multiply by the # of contracts you want |
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Term
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Definition
| futures contract on the shares of an individual company; haven't done really well yet |
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Term
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Definition
| world's largest futures/options exchange; owned by Deutsche Borse and Swiss exchange |
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Term
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Definition
| Chicago Mercantile exchange (CME) |
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Term
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Definition
| CBOT & CME merged in 2007; ultimately moved both onto CME Globex |
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Term
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Definition
| facilitates trading; intermediary b/w traders; takes long and short postion for each transaction; why you don't have to put up the entire margin |
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Term
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Definition
| 3rd Friday in November when everything expires; can lead to volatility in underlying price's bc everyone settling up and closing out; this high buy/sell volume leads to volatility |
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Term
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Definition
| so you can liquidate your position quickly; ie: currently long, enter into short side and close out; nets out long and short positions to zero |
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Term
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Definition
| daily settlement of obligations on future positions (adding and subtracting from margin account- which is normally 5-15% of total value of contract) |
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Term
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Definition
| if value of option falls below this margin, you'll receive a margin call |
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Term
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Definition
| convergence of future and spot prices at maturity of futures contact |
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Term
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Definition
| cash value (rather than literal asset) delivered to satisfy contract; ie: underlying asset is index- S&P 500 |
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Term
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Definition
| use futures contract to profit from change in prices; long position believes price will increase and short position believes price's will decrease |
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Term
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Definition
| insulate (protect) against price changes; long hedge protects against increase in price; short hedge protects against decrease in price |
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Term
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Definition
| difference b/w future and spot price; 0 at maturity |
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Term
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Definition
| risk from uncertain movements in spread b/w future and spot price; can't hedge against- unavoidable |
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Term
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Definition
| take long position in futures contract of one maturity and short position in contract of different maturity; both on same commodity; get profit if different in price's b/w 2 contracts changes in hoped- for direction; exploit movements |
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Term
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Definition
| hedging a position in one asset by establishing an offsetting position in a related but different asset |
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Term
| advantages of futures contract over direct stock purchase |
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Definition
| lower transaction costs; leverage- margin is much less than value of asset would be; better for timing/allocation strategies; takes less time to acquire the portfolio |
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Term
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Definition
| holding a well-diversified portfolio w/out attempting to search out security mispricing |
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Term
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Definition
| attempts to achieve portfolio returns more than commensurate w/ risk, whether by forecasting broad markets or by identifying mispriced securities |
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Term
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Definition
| strategy that moves funds b/w the risky portfolio and cash, based on forecasts of relative performance |
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Term
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Definition
| set of portfolio managers w/ similar investment styles that is used in assessing the relative performance of an individual portfolio manager |
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Term
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Definition
| reward-to-volatility ratio; ratio of portfolio excess return to standard deviation |
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Term
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Definition
| mutual funds or hedge funds that invest in other funds |
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Term
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Definition
| ratio of portfolio excess return to beta; same as sharpe measure but divided by B instead of st. dev. so only systematic risk counts (B) |
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Term
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Definition
| returns relative to a bogey |
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Term
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Definition
| the alpha of an investment; CAPM controls for risk of a portfolio; calculated from security characteristic line; so alpha ='s the excess return over the CAPM |
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Term
| alpha transfer/alpha transport |
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Definition
| investing in one market where you find positive alpha opportunities, but using index products both to hedge broad exposure to that market and to establish exposure to a different market |
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Term
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Definition
| construction of a positive- alpha portfolio w/ all systematic risk hedged away |
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Term
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Definition
| shorthand for virtually risk-free money market securities; ie: t-bills |
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Term
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Definition
| the rate of return an investment manager is compared to for performance evaluation |
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Term
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Definition
| contracts b/w 2 parties to trade sec's corresponding to different interest rates; based on LIBOR |
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Term
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Definition
| agreement to exchange one security for another to change the maturity, objectives, or change in quality (stocks vs bonds); ie: if firms in separate countries have comparative advantages on interest rates, then a swap could benefit both firms |
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Term
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Definition
| performance can vary widely across industries; ie: ROE can range from 10.2% for electronic equipment to 36.8% for cigs |
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Term
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Definition
| North American Industry Classification System; classification of firms into industry groups using numerical codes to i.d. industries; used for statistical analysis; is never quite perfect |
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Term
| 3 factors that determine sensitivity to the business cycle |
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Definition
| 1. sales- ie: necessities (milk) will have little sensitivity; 2. operating leverage- the division b/w fixed and variable costs; 3. financial leverage- the difference between debt and equity ratios- how much you borrow; firms in sensitive industries have high B stocks and are riskier- you can see the cyclicality |
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Term
| for industry analysis, draw line b/w industries through: |
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Definition
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Term
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Definition
| investment strategy that entails shifting the portfolio into industry sectors that are expected to outperform other based on macroecon. forecasts (relative b/w industry analysis and business cycle) |
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Term
| Economic activity (in regards to investing in certain industries at certain times) |
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Definition
| peak- invest in firms w/ natural resource extraction; contraction- invest in defensive industries that are less sensitive (groceries); trough- when the economy is poised for recovery, so invest in cap. goods industries like equipment, construction (b/c they are buying new equipment to get ready for the increase in demand; expansion- the eco. is growing, so invest in cyclical industries, ie: luxuries and banks (doing well b/c increasing loan volume) |
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Term
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Definition
stages through which firms pass as they mature:
1. start up stage- rapid and increasing growth, new technology
2. consolidation stage- stable growth; leaders emerge
3. maturity stage- slowing growth; standardized product
4. relative decline- minimal/negative growth; b/c of competition |
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Term
| Industry structure and performance |
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Definition
threat of entry; rivalry b/w existing competitors; pressure from substitute products; bargaining power of buyers; bargaining power of suppliers
--> all these things affect long- run profitability |
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Term
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Definition
| decomposition of profitability measures into component ratios |
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Term
| choosing a benchmark (in order to compare ratios) |
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Definition
| use that company's ratio from an earlier year; choose a firm in the same industry and compare ratios |
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Term
| comparables (for finding your firm's P/E) should match in: |
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Definition
| size; industry; leverage; growth rate |
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Term
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Definition
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Term
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Definition
| cross section of P/E ratio; amount of volatility that can be explained by the market/model |
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Term
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Definition
| converts Treynor measure into %age return basis |
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Term
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Definition
| decomposing overall performance into components; components are related to specific elements of performance |
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Term
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Definition
top- down is allocation across assets (stocks vs bonds vs t bills vs retail stocks)
bottom- up is stock picking/security selection of assets |
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Term
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Definition
| for mutual funds; based on a benchmark; fraction of the return difference b/w return of actual portfolio and bogey; ie: 10%(Rp-Rb); you get less when you underperform the benchmark; An additional, performance-based fee an advisor charges a client. The advisor charges the fee when he or she achieves a return above a specified benchmark; only for clients w/ huge accounts (> million) |
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Term
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Definition
| typical hedge fund contract; 20 basis points/year fixed + 20% of returns exceeding a high- water mark |
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Term
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Definition
| if returns are negative in one year, the high- water mark will increase by that amount for the next year; ie: high- water mark is 10%/year, and you underperform by 5% (-5%), next year high- water mark will be 15%; manager is playing w/ your money in his bonus pool |
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Term
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Definition
| buying/selling call options; profit when stock price increases |
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Term
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Definition
| buying/selling a put option; profit when stock price decreases |
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Term
| problems w/ using comparables to estimate P/E ratio |
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Definition
| 'comparable firm' is a subjective term; firms w/in same industry could have diff busn mixes, risk, and growth; potential for bias; even if you have a group of comps, there are still diff's b/w firm and comps |
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Term
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Definition
| total # of contracts traded |
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Term
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Definition
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