Finance Definitions

Alpha

A measure of performance on a risk-adjusted basis Alpha, often considered the active return on an investment, gauges the performance of an investment against a market index used as a benchmark, since they are often considered to represent the market's movement as a whole. The excess returns of a fund relative to the return of a benchmark index is the fund's alpha. Portfolio Manager (PM) returns 15% when the funds benchmark returns 12% the alpha is 3%. The rate of return that exceeds the expected rate of return

Batting Average

A statistical measure used to measure an investment manager's ability to meet or beat an index. Batting average is calculated by dividing the number of days (or months, quarters, etc.) in which the manager beats or matches the index by the total number of days (or months, quarters, etc.) in the period of question and multiplying that factor by 100. PM in a 30 day period outperforms the market 18 times the PM batting average is .60.

Price-sales ratio

A valuation ratio that compares a company's stock price to its revenues. The price-to-sales ratio is an indicator of the value placed on each dollar of a company's sales or revenues. It can be calculated either by dividing the company's market capitalization by its total sales over a 12-month period, or on a per-share basis by dividing the stock price by sales per share for a 12-month period. Like all ratios, the price-to-sales ratio is most relevant when used to compare companies in the same sector. A low ratio may indicate possible undervaluation, while a ratio that is significantly above the average may suggest overvaluation. Abbreviated as the P/S ratio or PSR, this ratio is also known as a "sales multiple" or "revenue multiple."

Beta

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), which calculates the expected return of an asset based on its beta and expected market returns. Beta is also known as the beta coefficient. Ex. S&P 500 has a beta of 1. A stock with a Beta of 2 will move 2x as volatile as the market.

Earnings per Share (EPS)

Earnings per share (EPS) is the portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability. Calculated as: When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period. Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number.

Sharpe Ratio

The Sharpe Ratio is a measure for calculating risk-adjusted return, and this ratio has become the industry standard for such calculations. The Sharpe ratio can also help explain whether a portfolio's excess returns are due to smart investment decisions or a result of too much risk. Sharpe ratio = (Mean portfolio return − Risk-free rate)/Standard deviation of portfolio return. Ex. 12%-3%/ 12= 0.75. Higher the number the better.

Sortino Ratio

The Sortino ratio is a variation of the Sharpe ratio that differentiates harmful volatility from total overall volatility by using the asset's standard deviation of negative asset returns, called downside deviation. The Sortino ratio takes the asset's return and subtracts the risk-free rate, and then divides that amount by the asset's downside deviation.

Treynor Ratio

The Treynor ratio, also known as the reward-to-volatility ratio, is a metric for returns that exceed those that might have been gained on a risk-less investment, per each unit of market risk. In essence, the Treynor ratio is a risk-adjusted measurement of a return, based on systematic risk. It is a metric of efficiency that makes use of the relationship that exists between risk and annualized risk-adjusted return. (Average Return of a Portfolio - Average Return of the Risk-Free Rate)/Beta of the Portfolio. Ex. 11% - 2% / 1.2 = 7.5

Debt to capital ratio

The debt-to-capital ratio is a measurement of a company's financial leverage. The debt-to-capital ratio is calculated by taking the company's debt, including both short- and long-term liabilities and dividing it by the total capital. Total capital is all debt plus shareholders' equity, which may include items such as common stock, preferred stock and minority interest.

Downside Capture

The down-market capture ratio is a statistical measure of an investment manager's overall performance in down-markets. The down-market capture ratio is used to evaluate how well or poorly an investment manager performed relative to an index during periods when that index has dropped. The ratio is calculated by dividing the manager's returns by the returns of the index during the down-market and multiplying that factor by 100. For example, a manager with a down-market capture ratio of 80 indicates that the manager's portfolio declined only 80% as much as the index during the period in question. Many analysts use this simple calculation in their broader assessments of individual investment managers.

Price to Earnings P/E Ratio

The price-earnings ratio (P/E Ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings. The price-earnings ratio can be calculated as: Market Value per Share / Earnings per Share For example, suppose that a company is currently trading at $43 a share and its earnings over the last 12 months were $1.95 per share. The P/E ratio for the stock could then be calculated as 43/1.95, or 22.05. EPS is most often derived from the last four quarters. This form of the price-earnings ratio is called trailing P/E, which may be calculated by subtracting a company's share value at the beginning of the 12-month period from its value at the period's end, adjusting for stock splits if there have been any. Sometimes, price-earnings can also be taken from analyst's estimates of earnings expected during the next four quarters. This form of price-earnings is also called forward P/E. A third, less common variation uses the sum of the last two actual quarters and the estimates of the next two quarters. The price earnings ratio is also sometimes known as the price multiple or the earnings multiple.

Price to book Ratio

The price-to-book ratio (P/B Ratio) is a ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. Also known as the "price-equity ratio". Calculated as: A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company. As with most ratios, be aware that this varies by industry. This ratio also gives some idea of whether you're paying too much for what would be left if the company went bankrupt immediately. BREAKING DOWN 'Price-To-Book Ratio - P/B Ratio' The P/B ratio reflects the value that market participants attach to a company's equity relative to its book value of equity. A stock's market value is a forward-looking metric that reflects a company's future cash flows. The book value of equity is an accounting measure that is based on the historic cost principle, and reflects past issuances of equity, augmented by any profits or losses, and reduced by dividends and share buybacks.

Price-earnings to growth Ratio (PEG)

The price/earnings to growth (PEG ratio) is a stocks price to earnings ratio divided by the growth rate of its earnings for a specified time period. The PEG ratio is used to determine a stock's value while taking the company's earnings growth into account, and is considered to provide a more complete picture than the P/E ratio. BREAKING DOWN 'Price/Earnings To Growth - PEG Ratio' While a low P/E ratio may make a stock look like a good buy, factoring in the company's growth rate to get the stock's PEG ratio can tell a different story. The lower the PEG ratio, the more the stock may be undervalued given its earnings performance. The degree to which a PEG ratio value indicates an over or underpriced stock varies by industry and by company type, though a broad rule of thumb is that a PEG ratio below one is desirable. Also, the accuracy of the PEG ratio depends on the inputs used. Using historical growth rates, for example, may provide an inaccurate PEG ratio if future growth rates are expected to deviate from historical growth rates. To distinguish between calculation methods using future growth and historical growth, the terms "forward PEG" and "trailing PEG" are sometimes used.

Upside Capture

The up-market capture ratio is the statistical measure of an investment manager's overall performance in up-markets. The up-market capture ratio is used to evaluate how well an investment manager performed relative to an index during periods when that index has risen. The ratio is calculated by dividing the manager's returns by the returns of the index during the up-market, and multiplying that factor by 100. For example, a manager with an up-market capture ratio of 120 indicates that the manager outperformed the market by 20% during the specified period.

Active Share

What it tells us - a measure of the percentage of stock holdings in a portfolio that differ from the benchmark index. In short, a measure of deviation away from the benchmark. • Help gives better perspective of where performance comes from • Help identify how much of performance is generated by the market • Help identify managers who are closet indexers (hug benchmark) • Studies show those managers with high active share are more likely to beat the benchmark vs. PM. 1. Active share = 0% - manager is the benchmark 2. Active share 50% - manager is 50% of benchmark (1/2 holdings are weighted differently than benchmark or not in the benchmark) 3. Active share 100% - no overlap with benchmark

Tracking Error

the traditional measure of comparing the difference between manager and benchmark which measures the volatility or standard deviation of the difference in a managers return vs. index returns. • High tracking error indicates high degree of active management. • The more different the manager is to the benchmark, the higher the tracking error