CONTENTS

• General
  • Acronyms
  • Definitions
• Performance and Attribution
  • Acronyms
  • Definitions
• Links
• Ratios
• Timeline
• Excel | Financial Formulae
• Software

• General | Acronyms
  • A.M.P.S. Auction Market Preferred Stock.
  • B.P.O. Business Process Outsourcing.
  • C.F.T.C. U.S. Commodities Futures Trading Commission.
  • E.C.B. European Central Bank.
  • E.O.N.I.A. Euro Overnight Index Average.
  • E.T.F. Exchange-Traded Funds.
  • L.I.B.O.R. London Interbank Offered Rate.
  • O.E.C.D. Organisation for Economic Co-operation and Development. A group of 30 of the world's most developed countries committed to democracy and the market economy.
  • S.A.M.A. Saudi Arabian Monetary Authority.
  • S&P Standard and Poor's.

• General | Definitions
  • Alpha. The amount of portfolio return produced in excess of the return predicted by a portfolio's beta.
  • Arbitrage Pricing Theory (A.P.T.). This theory, developed by Stephen Ross, pokes holes through the C.A.P.M.'s simplistic use of beta to numerically represent systematic risk. A.P.T. states that (1) beta is difficult to calculate since the S&P 500 or the N.Y.S.E. are imperfect representations of the market, (2) betas are not static over time, and (3) systematic risk is incompletely defined by beta and must also include other aspects of volatility such as sensitivity to changes in interest rates, inflation, national income, and exchange rates.
  • Arbitrage. Profiting from momentary disparities in prices wherein the same security, currency, or commodity is traded on two or more markets. The efficient market hypothesis suggests that such opportunities are rare and shortlived.
  • Arithmetic Average Return. Also known simply as average return or the mean. The mathematical average of the returns over a period. Equals the sum of N returns divided by N. Represents the return received in an average or typical year over the period for which the average is calculated. When used for forecasting, this return is viewed as optimistic unless the forcast period is extremely short (several years).
  • Basis Point. 1/100th of 1% or 0.01%.
  • Beginning Market Value (B.M.V.). The market value (trading price) of a security or grouping of securities at the beginning of a measurement period.
  • Beta. Also known as beta coefficient. Calculated using regression analysis. Represents the volatility of a security or portfolio relative to the market as a whole. A beta of 1 indicates that the price of the security or portfolio will move with the market. A beta of less than 1 indicates that the security will be less volatile than the market. A beta of greater than 1 indicates that the security will be more volatile than the market. The beta for a group of securities in a portfolio is determined by calculating the weighted average of the betas of the individual securities.
  • Black-Scholes Model. A model developed by Fischer Black, Myron Scholes, and Robert Merton to make quantitative estimates of options values based on the following five factors: (1) option price is inversely proportional to exercise price, (2) option price is directly proportional to stock price, (3) option price is directly proportional to duration, i.e. expiration date, (4) option price is directly proportional to the volatility of the underlying stock, (5) option price is directly proportional to the prevailing interest rates. Their work earned Merton and Scholes the Nobel prize in economics (Black was already deceased).
  • Bond. A financial instrument that promises fixed income (i.e. coupon or interest rate) at end of a fixed maturity period (i.e. weeks, months, years, or decades). Therefore, a $1,000 1-year bond, when first issued/sold, might promise a 5% (or $50) coupon. However, bonds are traded in the secondary market. If, due to rising inflation, the price of the $1,000 bond falls to $990 in the market, then its yield (coupon/price, i.e. effective coupon rate) would rise to 5.05% ($50/$990). Par refers to a bond's price at the time of its issuance. If a bond's current market price equals par, then its coupon will equal its current yield.
  • Broad Tape. The Dow Jones financial news tape.
  • Broker. Brings buyers and sellers together, but does not maintain an inventory. Also known as agent or sales representative. Since most brokerage firms operate both as brokers and as principals (dealers), the term broker-dealer is commonly used.
  • Buying on Margin. Borrowing money to buy an investment instrument.
  • Capital Asset. Also known as fixed asset. Accounting and tax terminology for an asset that has a remaining life of more than one year and is expected to produce income over its remaining lifetime. Capital assets are not immediately listed on the profit and loss (P&L) statement as expenses; instead, their costs are written off over the period of their lifetimes as depreciation.
  • Capital Asset Pricing Model (C.A.P.M.). This theory, developed by William Sharpe, John Lintner, and Fischer Black, states that there is no premium (excess return) to be gained from bearing unsystematic risks, which can be diversified away. In other words, portfolio's average long-run rate of return can only be increased by adding systematic risk, which cannot be diversified away. The theory's use of beta to numerically represent systematic risk has come under fire, especially from the A.P.T.
  • Capital Gain (Loss). This is loosely taken to represent the price appreciation (depreciation) on an investment. That is, the difference between the purchase price and the selling price. However, stricly speaking, this is something that is defined by the I.R.S. A capital gain is termed short-term (and taxed more leniently) if the asset is held for 12 months or less and long-term otherwise.
  • Capital Gains Yield. See Dividend Growth Model.
  • Carry Return. The return on an investment less the cost (if any, as in the case of a carry trade) of borrowing required to purchase the investment.
  • Carry Trade. A trade that involves borrowing money and paying interest in order to buy something that has a higher rate of interest.
  • Castle-in-the-Air Theory. This theory, perhaps best articulated by the economist John Maynard Keynes in 1936, suggests that investment instruments should be valued based on crowd psychology, i.e. how the general public can be expected to value them. The application of this theory is referred to as technical analysis (or chartism).
  • Co-Variance. A statitical quantity used in M.P.T. Represents the degree of correlation or parallelism between the returns of two securities, i.e. the degree to which the returns for two securities move in tandem in response to market events. A positive co-variance implies a high degree of parallelism. A negative co-variance implies a low degree of parallelism.
  • Corporate Actions. Another term for corporate reorganizations including mergers, acquisitions, stock splits, reverse stock splits, spinoffs, and tender offers.
  • Current Asset. Accounting terminology for an asset that can or will be liquidated within a year.
  • Current Liability. Accounting terminology for an unpaid bill that must be paid within a year.
  • Current Yield. A bond's annual coupon amount divided by its purchase price. As a bond's price falls, its yield rises and vice versa.
  • Dealer. Maintains an inventory and stands ready to buy and sell at any time. Since most brokerage firms operate both as brokers and as principals (dealers), the term broker-dealer is commonly used.
  • Debenture. An unsecured bond.
  • Depreciation. Accounting terminology for representing the economic cost of using a capital or fixed asset over the life of the asset.
  • Derivative. A form of leveraging whereby a smaller derivative investment allows an investor to speculate on the outcome of a larger underlying investment without actually having to own the larger underlying investment. Therefore, the value of the derivative is derived from the value of the underlying asset. The two most popular forms of financial derivative securities are futures and options contracts. Many other derivative-type instruments build on these two basic forms. These include swaps, inverse floaters, leaps, lookbacks, swaptions, quantos, rainbows, floors, caps, and collars. Also REMICS, M-CATS, and TIGRS. There are also derivatives on derivatives.
  • Disintermediation. See securitization.
  • Dividend Growth Model. A stock valuation methodology whereby the current price per share of a stock is determined to be equal to D/(R-g), where D is the dividend for the next period, R is the discount rate (or expected rate of return on investment), and g is the dividend growth rate. The dividend growth model makes the reasonable assumption that g is also the rate at which the stock price grows. Hence, g can be interpreted as the capital gains yield. D/P is also known as the dividend yield. By solving for R, we get R = D/P + g (or the sum of the dividend yield and the capital gains yield).
  • Dividend Yield. See Dividend Growth Model.
  • Dollar Cost Averaging. Refers to the scheme of investing the same fixed amount of money in, for example, the shares of some mutual fund at regular intervals (say, every month) over a long period of time. Periodic investments of equal dollar amounts in common stocks can reduce (but not avoid) the risks of equity investment by ensuring that the entire portfolio of stocks will not be purchased at temporarily inflated prices. It works because the investor acquires more shares when they are cheap and fewer when they are expensive. One potential drawback is that brokerage commissions are relatively high on small purchases.
  • Duration. A concept, first developed by Frederick Macaulay in 1938, that measures the price volatility/sensitivity of a fixed price asset or portfolio (henceforth bond) in response to changing interest rates by measuring the length of the bond. It is a weighted-average term-to-maturity of the bond's cash flows, the weights being the present value of each cash flow as a percentage of the bond's full price. The greater the duration of a bond, the greater its percentage volatility. In general, duration rises with maturity, falls with the frequency of coupon payments, and falls as the yield rises (the higher yield reduces the present values of the cash flows). The term modified duration is used in the strict sense because of modifications to Macaulay's formulation. Duration, as a measure of percentage of volatility is valid only for small changes in the yield. For larger yield changes, volatility is measured by a concept called convexity.
  • Duration Analogy. A Salomon Smith Barney study compared duration to a series of tin cans equally spaced on a seesaw. The size of each can represents the cash flow due, the contents of each can represent the present values of those cash flows, and the intervals between the cans represent the payment periods. Duration is the distance to the fulcrum that would balance the seesaw. The duration of a zero-coupon security would thus equal its maturity because all the cash flows (and, therefore, all the weights) are at the other end of the seesaw.
  • Earnings Per Share (E.P.S.). The portion of a company's profit allocated to each outstanding share of common stock.
  • Effective Duration. The duration calculated using the approximate duration formula for a bond with an embedded option, reflecting the expected change in the cash flow caused by the option. Measures the responsiveness of a bond's price taking into account that expected cash flows will change as interest rates change due to the embedded option.
  • Efficient Market Hypothesis (E.M.H.). This hypothesis claims that it is not possible to predict future stock prices because all known information that might be used to make such a prediction has already been factored into the current market price. The three forms of this hypothesis (weak, semi-strong, and strong) make decreasing concensions to the value of technical or fundamental analysis in predicting future stock prices.
  • Embedded Option. An option that is part of the structure of a bond that gives either the bondholder or the issuer the right to take some action against the other party, as opposed to a bare option, which trades separately from any underlying security.
  • Ending Market Value (E.M.V.). The market value (trading price) of a security or grouping of securities at the end of a measurement period. The period return (or return for the period) is equal to the E.M.V. less the B.M.V.
  • Firm-Foundation Theory. This theory, proposed by S. Eliot Guild and developed by John B. Williams, Irving Fisher of Yale, and Warren Buffet (the sage of Omaha), states that investment instruments should be valued based on their carefully calculated intrinsic value. In reality, of course, the intrinsic value is based on educated guesses about what the amount and duration of a company's growth. The application of this theory is referred to as fundamental analysis.
  • Federal Funds Rate. The U.S. equivalent of L.I.B.O.R.
  • Futures Contract. Also known as a forward contract. Involves the obligation to purchase or deliver a specified commodity or financial instrument at a specified price at some specific future period. Futures are typically settled in cash based on the difference between the initial contract price and the final cash market price of the commodity or financial instrument without involving a physical delivery. For example, a farmer may wish to enter into a futures contract to sell a fixed amount of wheat at a fixed price at the end of the harvest season. Similarly baker may wish to enter into a futures contract to buy a fixed amount of wheat at a fixed price at the end of the harvest season. Therefore, both the farmer and the baker have the opportunity to hedge their respective risks by entering into a futures contract with each other. The farmer is insured against prices falling. The baker is insured against prices rising.
  • Geometric Average Return. Equals the product of N returns (using the growth rate format, i.e. 1+r) raised to the power of 1/N. Represents the average compound return per year over the period for which the average is calculated. When used for forecasting, this return is viewed as pessimistic unless the forcast period is extremely long (several decades).
  • Greater-Fool Theory. This theory, related to the castle-in-the-air theory, argues that it is reasonable to buy an overvalued investment instrument as long as you expect to be able to sell it to a greater fool at an even higher price.
  • Junk Bond. A non-investment-grade bond, defined by an S&P rating lower than BBB.
  • Leveraged Buyout (L.B.O.). The takeover of a company using funds borrowed against the target company's assets and paid for using the target company's cash flow.
  • Leveraging. Any technique that increases the potential rewards and risks of an investment. Examples include options and derivatives.
  • Limit Order. An order to buy a stock at or below a specified price, or to sell a stock at or above a specified price.
  • Market Capitalization. One way to measure a company's size or worth. Equal to the price per share multiplied by the number of shares outstanding.
  • Market Order. Order to buy or sell a stated amount of an equity security at the most advantageous price obtainable after the order is represented in the trading crowd.
  • Market Value. (1) The price at which a security is trading and could presumably be purchased or sold. (2) What investors believe a firm is worth; calculated by multiplying the number of shares outstanding by the current market price of a firm's shares.
  • Modern Portfolio Theory (M.P.T.). The theory, pioneered by Harry Markowitz, states that it is possible to create an efficient frontier of portfolios offering the maximum possible expected return for a given level of risk. The theory also states that portfolios can be diversified by mixing securities with negative co-variance in order to reduce risk for the same expected portfolio return.
  • Net Asset Value (N.A.V.). The value of a fund's investments. For a mutual fund, the net asset value per share usually represents the fund's market price (or bid price), subject to a possible sales or redemption charge. In the case of no-load funds the market price, offer price and net asset value are the same number. For a closed-end fund, the market price may vary significantly from the net asset value.
  • No-Load Funds. Mutual funds that do not charge investors front-end (buying) or back-end (selling) commissions. Examples include Fidelity, T. Rowe Price, Dreyfus, USAA, American Century and Vanguard.
  • Option. Typically, a stock option. This instrument provides the right (but not the obligation) to buy (call) or sell (put) a financial instrument at a specific price on or before a set date. The behavior of this call (buy) option is analogous to the purchase of a $1 coupon (option premium) that entitles the buyer to buy any Domino's pizza for $10 (striking price) until July 31, 2007 (expiration date). The buyer may exercise the coupon and buy a $15 Domino's pizza for $10 (total cost = $1 for the coupon book + $10 for the pizza = $11), or capitalize on a sale elsewhere to buy a pizza for $9.95 (total cost = $1 for the coupon book + $9.95 for the pizza = $10.95). A call (buy) option is written by the seller and purchased by the buyer (e.g. a discount coupon). A put (sell) option is written by the buyer and purchased by the seller.
  • Over-the-Counter (O.T.C.). Dealer markets in stocks and long-term debt are called over-the-counter. Most trading in debt securities takes place over-the-counter. The expression over-the-counter refers to days of old when securities were literally bought and sold at counters in offices around the country. Today, a significant fraction of the market for stocks and almost all of the market for long-term debt have no central location; the many dealers are connected electronically.
  • Point. 1%. See also Basis Point.
  • Preferred Stock. A class of capital stock that pays dividends at a specified rate and that has preference over common stock in the payment of dividends and the liquidation of assets. Preferred stock does not ordinarily carry voting rights.
  • Primary Market. Refers to the original sale of securities by governments and corporations. Corporations engage in two types of primary market transactions: public offerings (selling securities to the general public) and private placements (negotiated sale involving a specific buyer).
  • Repo. Sale and repurchase agreement. One of the ways that central banks assist banks. Central banks buy nominated securities from banks. Banks agree to repurchase these securities at a premium from the central bank after a stipulated period.
  • Return. The gain (or loss) resulting from the purchase of an investment. Return has two components. Although the specifics are determined by the Internal Revenue Service (I.R.S.), broadly the two components are as follows. The income component refers to the cash (or dividend, interest, coupon, etc.) resulting from the investment. The capital gain (or loss) component, whether realized or not, refers to the change in the value of the asset underlying the investment. Nominal return is that which has not been adjusted for inflation or taxes. Real return is that which has been adjusted for inflation, typically using the change in consumer price index (C.P.I.). Note that the nominal return must equal the rate of inflation in order just to break even.
  • Risk. The probability of suffering a loss, expressed interchangeably as either of two statistical quantities: variance and standard deviation.
  • Risk Premium. The average excess return for a risky security. Used as a measure of the expected reward in exchange for risk. Equal to the difference between the average returns for the security in question and T-bills (U.S. Treasury Bills), which are assumed to be risk-free.
  • Secondary Market. Where securities are bought and sold after the original sale. There are two kinds of secondary markets: auction markets (or exchanges) and dealer markets (or over-the-counter or O.T.C. markets). Auction markets differ from dealer markets in two ways. First, an auction market has a physical location (e.g. Wall Street). Second, in a dealer market, most of the buying and selling is done by the dealer. The primary purpose of an auction market, on the other hand, is to match those who wish to sell with those who wish to buy. Dealers play a limited role. Examples of auction markets include the major stock exchanges such as the New York Stock Exchange (N.Y.S.E.). Examples of dealer or O.T.C. markets include the National Association of Securities Dealers Automated Quotation (N.A.S.D.A.Q.) system.
  • Securitization. Wherein borrowers borrow by selling a security to lenders rather than borrowing from a bank. Also known as disintermediation. Refers to cutting out the role of the bank as intermediary and connecting borrowers directly with lenders. Also refers to the pooling of assets to back a financial instrument, e.g. the pooling of individual mortgages in the case of mortage-backed-securities (M.B.S.).
  • Selling Short. A way to make money if stock prices fall. It involves selling stock you do not presently own in the expectation of buying it back later at a lower price. It's like hoping to buy low and sell high, but in reverse order.
  • Spread. Short for bid-ask spread. In general, in any O.T.C. or dealer market (see Secondary Market), the bid price represents the price a dealer is willing to pay for a security and the asked price (or ask or offer price) represents the price at which a dealer is willing to sell a security. The difference between the two prices is called the bid-ask spread and represents a dealer's profit.
  • Spread Over Treasuries. The difference between an interest rate and the U.S. Treasuries rate of return, expressed in percentage or basis points.
  • Standard Deviation. A statistical quantity used to define risk of a stock or a portfolio of stocks. Equal to the positive square root of the variance. For reasonably symmetric frequency distributions (also known as normal curves, bell curves, or normal distributions), 66% of returns fall within 1 standard deviations, 95% of returns fall within 2 standard deviations, and 99% of the returns fall within 3 standard deviations. (A normal curve is centered around the mean or the average of the data points that it graphs.) Represented by the Greek letter sigma.
  • Structured Product. Combination of two or more financial instruments, at least one of which must be derivative.
  • Systematic Risk. Also known as market risk. The component of a security's risk that can be attributed to movements in the market as a whole. Its numerical representation is known as beta. This type of risk cannot be eliminated by diversification and therefore tends to be compensated via a higher rate of return.
  • Ponzi Scheme. A fraudulent investimg scheme that promises high rates of return at little risk to investors. The scheme generates returns for older investors by acquiring new investors. Named after Charles Ponzi, a Boston clerk who first orchestrated such a scheme in 1919. Similar to a pyramid scheme except that in a pyramid scheme all investors automatically profit in proportion to their proximity to the top of the pyramid whereas in a Ponzi scheme all the money goes directly to the person at the top who then distributes at his/her discretion.
  • Unsystematic Risk. The component of a security's risk that cannot be attributed to movements in the market as a whole. This risk arises from non-market elements specific to the particular company and cause the company's stock to move independently of the market. Sources of unsystemtic risk include labor disputes, accounting fraud, or the receipt of a large new contract. This type of risk can be eliminated by diversification and therefore tends not to be compensated via a higher rate of return.
  • Variance. A statistical quantity used to define risk of a stock or a portfolio of stocks. Equal to the average squared difference between the actual return and average return. Represented by the Greek letter sigma squared.
  • Yield. Return on an investment.
  • Yield Curve. A graph depicting the term structure of interest rates by plotting the yields of all bonds of the same quality with maturities ranging from the shortest to the longest available. The resulting curve shows whether short-term interest rates are higher or lower than long-term rates. If short-term rates are lower, the curve is called positive. Otherwise, it is called negative or inverted. If the difference between short-term and long-term interest rates is small, then the curve is called flat. Mostly, the yield curve is positive since investors who are willing to tie up their money for a longer period of time usually expect to be compensated for the extra risk via a higher yield. The most common version of the yield curve plots U.S. Treasury securities with maturities ranging from the three-month Treasury Bill to the 30-year Treasury Bond.
  • Yield to Maturity (Y.T.M.). Also called maturity yield. The rate of return on a fixed income instrument such as a bond, taking into account the total of annual interest payments, the purchase price, the redemption value, and the amount of time remaining until maturity.

• Performance and Attribution | Acronyms
  • A.C.T.R. (Gain or Loss in) Appreciation Contribution to Return.
  • B.R.S. Benchmark Rebalancing System.
  • C.C.R.
  • C.C.T.R. (Gain or Loss in) Carry Contribution to Return.
  • C.T.D. Contribution to (Effective) Duration.
  • C.T.S.D. Contribution to Spread Duration.
  • D.P.S. Daily Performance System.
  • E.M.D. Emerging Markets Debt.
  • E.R. Enterprise Reporting.
  • G.B.A. Global Bond Attribution. Global Balanced Attribution.
  • G.C.A. Global Credit Attribution.
  • H.Y. High Yield.
  • M.B.S. Mortgage-Backed Securities.
  • M.V.P. Market Value Percentage (Percentage of Market Value).
  • P.A.S. Performance Attribution System.
  • R.R.G. Report Request Generator.
  • S.O.M. Start of Month.

• Performance and Attribution | Definitions
  • Absolute Contribution. Concentration wherein only the account is concentrated but not the benchmark. This is done when the benchmark for attribution is implicit (such as a libor rate) rather than explicit (such as the S&P 500 Index).
  • Alpha. The difference between portfolio return and benchmark return. When used alone, alpha refers to portfolio total return minus benchmark total return. Alpha may be qualified to refer to a specific attribution effect or return, e.g. excess alpha refers to portfolio excess return minus benchmark excess return.
  • Attribution Effects. Measurements of the extent to which active portfolio management decisions contribute to portfolio returns that are higher or lower than their respective benchmarks.
    • Legend.
      • WBG. Benchmark's security weight within the group. Benchmark weight for the security / Benchmark weight for the group.
      • WPG. Portfolio's security weight within the group. Portfolio weight for the security / Portfolio weight for the group.
      • RBG. Benchmark's group return. Sum of products (security return * benchmark weight for the security) / Benchmark weight for the group.
      • RPG. Portfolio's group return. Sum of products (security return * portfolio weight for the security) / Portfolio weight for the group.
      • RBT. Benchmark's total return.
      • RPG. Portfolio's total return.
    • Allocation Effect. Also known as asset allocation effect, sector allocation effect, industry allocation effect, or timing effect. The result of weighting decisions, e.g. overweighting the technology sector relative to the automotive sector or overweighting the I.B.M. stock relative to the Microsoft stock. (WPG-WBG)*(RBG-RBT).
    • Selection Effect. The result of stock picking decisions, e.g. selecting the I.B.M. stock or deselecting the Microsoft stock. WBG*(RPG-RBG).
    • Currency Effect. The result of currency-based weighting decisions, e.g. overweighting a Euro-based stock relative to a Dollar-based stock. Applicable for attribution of global portfolios.
    • Interaction Effect. The residual excess return not attributable to one of three effects described above. (WPG-WBG)*(RPG-RBG).
    • Total Effect. The sum of all of the above effects.
  • Concentration. A preparatory step for attribution involving the aggregation of security returns, market values, and analytics for accounts and benchmarks on the basis of grouping criteria (such as sector, country, region, etc.) as defined by hierarchies.
  • Constituent. A security in the context of a benchmark or index. The weight of a constituent is calculated based on its market capitalization.
  • Contribution. The process of assessing how individual securities or groups of securities (sectors, regions, etc.) contributed to a portfolio's return. Also referred to as absolute attribution. A portfolio component's contribution is calculated by multiplying the component's weight in the portfolio by the component's return. The sum of all the component contributions must equal the total portfolio return.
  • Currency. Base currency refers to the currency in which the money was originally invested. Local currency refers to the currency of the investment instrument and, in the case of global portfolios, may be different from the base currency.
  • Duration Effect. The portion of portfolio or benchmark total return that is attributable to parallel yield curve shifts. All key rates are assumed to move identically to the portfolio's reference rate and the resultant return is estimated as the duration effect.
  • Excess Return. The portion of portfolio or benchmark return that is attributable to factors other than yield curve shifts. Equal to total return less duration effect, yield curve effect, and yield advantage effect.
  • Grouping of Securities.
    • Composite
      • Group or Asset
        • Account
          • Sub-account or Portfolio
            • Holdings (i.e. securities in the context of a portfolio)
  • Grouping of Strategies.
    • Theme
      • Group
        • Class
          • Strategy
  • Hierarchy. A multi-level tree structure that defines weighted groupings (or concentration/aggregation criteria) for account and/or benchmark statistics based on security characteristics (such as market sector, country, region, etc.) or strategies (such as overweighting or underweighting a market sector, currency, asset class, etc.). For example, level 1 of the hierarchy might define an aggregation of statistics by continent (North America, Europe, etc.) while level 2 of the hierarchy might define an aggregation of statistics by country (U.S.A., Canada, etc.).
  • Investment Strategy. A decision to overweight or underweight a specific asset class, market sector, or market characteristic for a portfolio relative to its benchmark.
  • Reference Rate. A single key rate (on the yield curve or another market-quoted interest rate), particular to and characteristic of a portfolio, that is used to define the amount of parallel yield curve shift over time.
  • Weight. A fraction representing the ratio of a portfolio component's beginning market value (B.M.V.) relative to the portfolio's B.M.V. The portfolio component could be a security, sector, or any other portfolio sub-division. The sum of the component weights for a portfolio must always add up to 1.
  • Work Unit. Also called a work block. A unit of work in P.A.S. Each P.A.S. report/request gets broken into work units along two dimensions: (1) period and (2) concentration/attribution. First, if a request spans multiple calendar months, it is split into work units such that the start and end dates of each work unit fall within a single calendar month. Secondly, a one-month account or benchmark concentration request translates into a single work unit and a one-month attribution request translates into three work units as follows: (1) an account concentration work unit, (2) a benchmark concentration work unit, and (3) an attribution work unit.
  • Yield Advantage Effect. The portion of portfolio or benchmark return that is attributable to generation and accrual of yield over the attribution period in excess of the yield generated by US Treasury securities of equivalent duration.
  • Yield Curve. Also known as key rates. A series of U.S. Treasury yields at various durations (1, 2, 3, 5, 10, 20, and 30 years). Used to calculate duration and yield curve effects.
  • Yield Curve Effect. The portion of portfolio or benchmark total return that is attributable to non-parallel yield curve shifts. Calculated by subtracting the duration effect from the return estimated via the actual key rate movements.

• Links
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    • Bloomberg | Bloomberg Financial Glossary
  • Other
    • The Spaulding Group (The Journal of Performance Measurement)
    • Finance and Investment Research (Wharton)
    • Wikinvestopedia
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    • investools
    • Recommended Books on Business
    • Fidelity Online Stock Trading
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    • SmartMoney (Map of the Market)
    • U.S. Securities and Exchange Commission (S.E.C.)
    • CompoundingHappens (Damien Laker)
    • U.S. Commodities Futures Trading Commission (C.F.T.C.)
  • Certification
    • C.F.A. Certificate in Investment Performance Measurement (C.I.P.M.)
    • Front University | Financial Markets Certification
    • National Security Exchange (N.S.E. India) | Certificate in Financial Markets (N.C.F.M.)
  • Software
    • Calypso
    • OpenLink
    • i-flex (now part of Oracle Financial Services)

• Ratios
  • Market Value
    • P/BV. Price/Book-Value. Also known as market-to-book. Equal to (market value per share)/(book value per share). Compares the market value of a firm's investments to their cost. A value of less than 1 could mean that the firm has not been successful overall in creating value for its stockholders. Book value per share is total equity (not just common stock) divided by the number of shares outstanding.
    • P/E. Price/Earnings. Also known as multiple. The price per share of a stock divided by its basic earnings per share. Trailing P/E refers to the latest reported earnings. Forward P/E refers to next year's earnings as forecasted by analysts. A high P/E generally indicates young, high-growth, risky, low-yield (low-dividend) companies. A low P/E generally indicates mature, low-growth, blue-chip, stable, high-yield (high-dividend) companies.
  • Short-Term Solvency or Liquidity
    • Current Ratio. Measures short-term solvency or liquidity. Equal to (current assets)/(current liabilities).
    • Quick Ratio. Also known as the Acid-Test Ratio. Similar to the current ratio except that inventory (the least liquid current asset) is omitted. Equal to (current assets - inventory)/(current liabilities).
  • Volatility
    • Sharpe Ratio. A measure of an asset's return relative to the level of risk taken. Equal to an asset's risk premium divided by the standard deviation of its returns.

• Timeline
  • 1720. U.K. enacts the Bubble Act, forbiding the issuance of stock certificates by companies.
  • 1825. U.K. repeals the Bubble Act, forbiding the issuance of stock certificates by companies.
  • August 1857. U.S. railroad stocks crash.
  • 1909. The credit ratings business is launched as John Moody issues his first ever ratings of company debt for 200 American railway companies.
  • 1919. Charles Ponzi, a Boston clerk, is the first to employ what later comes to be known as a Ponzi scheme.
  • September 5, 1929. U.S. stock market crash starts with the "Babson Break," named after Roger Babson of Wellesley, Massachusetts, who had been predicting a crash for years.
  • October 29, 1929. U.S. stock market crashes.
  • 1933. The U.S. passes the Glass-Steagall Act drawing a clear line separating commercial banks (allowed to take deposits) and investment banks (allowed to underwrite securities).
  • 1936. Economist John Maynard Keynes articulates what has come to be known as the castle-in-the-air theory, which states that investment instruments should be valued based on crowd psychology, i.e. how the general public can be expected to value them.
  • January 19, 1968. The fall of Litton Industries signals the begining of the end of synergism or conglomerates wherein in company A acquires a smaller company B and increases the total combined value of A+B merely as a result of the acquisition. Also known as 2+2=5.
  • 1968. Academics develop a methodology known as time-weighted return (T.W.R.) in order to calculate a return that is adjusted for cash inflows and outflows in such a way as to determine portfolio manager's performance by adjusting for the impact of cash flows that were not under the control of the portfolio manager.
  • 1971. U.S. dollar is detached from the gold standard.
  • 1975. Formal derivates trading starts in the U.S.
  • 1980. Bunker Hunt and Herbert Hunt corner the silver market ($17 billion worth; by increasing the demand in the futures market while restricting the supply in the spot market) and engineer a price hike from $6 per ounce to $50 per ounce.
  • 1982. Futures trading on stock indexes starts in the U.S.
  • October 19, 1987. U.S. stock market crashes. The Dow Jones Industrial Average loses a third of its value.
  • August, 1998. Russia defaults on its Treasury bills.
  • November, 1999. The U.S. repeals the Glass-Steagall Act removing the line separating commercial banks from investment banks.
  • Q2 2000. The Internet bubble begins to burst.

• Excel | Financial Formulae
  • ABS(). Absolute.
  • AVERAGE(). Average of the cell range.
  • EXP(N). Euler's number (e) raised to the power of N.
  • FV(InterestRatePerPeriod,NumberOfPeriods,PaymentPerPeriod,PresentValue,PaymentType). Future value. PaymentPerPeriod and PresentValue are entered as negative numbers. PaymentType=0 (the default) implies that dividends are paid at the end of each period. PaymentType=1 implies that dividends are paid at the start of each period.
  • IRR(RangeOfCellsRepresentingFutureCashFlows,Guess).
  • LN(). Natural logarithm (i.e. logarithm to the base of Euler's number (e).
  • N^X. N raised to the power of X.
  • NPV(Rate,RangeOfCellsRepresentingFutureCashFlows).
  • PRODUCT(). Product of the cell range.
  • PV(InterestRatePerPeriod,NumberOfPeriods,PaymentPerPeriod,FutureValue,PaymentType). Present value. PaymentPerPeriod and FutureValue are entered as negative numbers. PaymentType=0 (the default) implies that dividends are paid at the end of each period. PaymentType=1 implies that dividends are paid at the start of each period.
  • Rate(NumberOfPeriods,PaymentPerPeriod,PresentValue,FutureValue,PaymentType,Guess). Rate of interest. PaymentPerPeriod and FutureValue are entered as negative numbers. PaymentType=0 (the default) implies that dividends are paid at the end of each period. PaymentType=1 implies that dividends are paid at the start of each period.
  • SUM(). Sum of the cell range.