CIMA Definitions

What is the minimum standard of a commodity known as

" basis grade

Goals of the Central Bank

1. Controlling inflation 2. Stabilizing the local currency 3. Maintaining full employment

Activities of the Central Bank

1. Issuing currency 2. Regulating credit 3. Bank oversight 4. Serve Banking needs of the government 5. Act as lender of last resort 6. Manage Exchange reserves

availability bias

A COGNITIVE BIAS where easily recalled outcomes ( often from more recent information) are perceived as being more likely that those that are harder to recall or understand

Central Tendency

A central value for a set of numbers, usually expressed as a mean, median, or mode

Collateralized debt Obligation ( CDO)

A derivative type of fixed income security in which pools of income generating assets are grouped together , repackaged and sold in various pieces to investors , the underlying assets ( mortgages, consumer loans , etc) are the collateral for the debt security ; each " tranche" ( as they are called) carries its own risk profile

Central bank

A governmental or quasi governmental entity responsible for overseeing a country's monetary system

Cash Ratio

A measurement of corporate liquidity and company's ability to cover immediate payables, calculated by taking cash and cash equivalents and dividing them by current liabilities ; the higher the number , the stronger the company's position to pay short term debt

Coefficient of Variation

A relative , NOT ABSOLUTE, measure of dispersion, it is the ratio of : STANDARD DEVIATION/ MEAN Know as unitized risk and the variation coefficient

Coefficient of determination ( R Squared)

Also know as R squared, it gives the proportion of variation in one variable that can be explained by another variable; the higher the number the more meaning of a meaningful relationship R Squared Range of .8 and 1.0 measures a strong relationship R Squared Range Beloit .8 would indicate week relationship between variables

Capitalization weighted index

Also know as a " market weighted index"

ADR

American Depository Receipt

Accredited Investor ( Employee Benefit Plan or Trust)

Assets > $5,000,000

How do CEF's differ from ETF's and Open End Funds

CEF's differ from Exchange Traded Funds ( EFTs) and open ended mutual funds in that CEF's may not raise new funds ( contributions)

Cognitive dissonanace

Confusion or frustration that arises when n individual receives new information that does not match up with our conform to preexisting beliefs or experiences

Carry strategies ( carry trade)

Considered an arbitrage strategy in which an investor borrows at low rates and lends at higher rates ( currency carry trade)

Coincident economic indicator

Economic data used to determine current position of the business cycle;

Examples of Coincident Economic indicators

GDP - Gross Domestic Product Non - Agricultural payrolls, Personal Income Industrial Production Manufacturing and trade sale

Absolute Return

Gain or Loss of an investment ( expressed as a percentage terms) over a period of time; an absolute return strategy is one that employs multiple strategies ( e.g. long / short, leverage, arbitrage, etc. ) in order to achieve positive returns

Capitalization Rate Formula

Income / Total Value or Income / Original Price

Accrued Interest

Interest that has been earned or is credited but has Not been paid yet.

Closed - end fund

Is an investment pool managed by an advisor that is actively priced and traded on a stock exchange, capital is raised through an initial public offering ( IPO )

Cash Flow per Share

Measurement of company financial strength = Operating Cash Flow - Preferred Dividends/ number of shares outstanding ; *** analyst prefer it to EPS***

Accounts payable turnover ratio

Measurement of corporate liquidity that determines how promptly suppliers are paid:

Cash dividends

Money ( cash ) paid to shareholders based on current or accumulated earning

Accounts Receivable Turnover ratio Formula

NET SALES/ AVERAGE ACCOUNTS RECEIVABLES

Capitalization rate

Often used for real estate investments, the cap rate can used to determine the investors potential return,

Accounts payable turnover ratio Formula

PURCHASES /AVG. ACCOUNT PAYABLE AMOUNT DURING THAT TIME

Appraisal Ratio Formula

Portfolio ALPHA / Unsystematic Risk of those securities

Asset Liability Modeling

Risk management tool ( strategy) to manage assets to future obligations ( liabilities); goes beyond traditional asset allocation decisions ; modeling that includes quantifying downside risk, conducting scenario and simulation analysis

TRIN Index Calculation

Step #1 NUMBER of ADVANCING Issues / Number of Declining Issues Step #2 Volume of Advancing Issues / Volume of Declining Issues Step # 3 Step#1/ Step #2

Absolute investment Performance

The investment returned achieved over a period of time; it is considered on its own, as opposed to relative investment performance which is compared to a benchmark or other investment.

Capitalization weighted index

This index weights individual companies or stocks based on their market capitalization thus larger stocks receive more proportional representation in the index; the value of a cap-weighted index may be computed by summing the value of all market capitalizations and dividing by the number of stocks in the index.

Cash Flow Yield

Used by value investors to determine relative value, a financial ratio used to determine how much cash is generated operations = Operating Activities - Net Cash Flow/ Net income

Anchoring

a COGNITIVE bias where the investors are influenced by purchase point or arbitrary price levels and cling to those numbers when deciding to buy or sell and investments; Individuals often rely too heavily on certain information ( often the first data points received) when making decisions )

candlestick chart

a chart that technical analysts use in which the daily line contains the opening and closing prices of the day along with the high and low prices, the box that overlays the line indicates the daily price range between open and close, if the bar is filled in that means the closing price was lower than the opening price , and if the bar is not filled in it means the closing price was lower than the opening,

commodity futures contract

a contract in which the holder is obligated to accept delivery and the seller is required to make delivery of the specified commodity at the specified time and place, common hedge against price fluctuations of the commodities

call option

a contract that gives the holder the right ( but not the obligation) to purchase particular security at a specified time and price

bond

a debt obligation , which is legal commitment to repay an amount borrowed and any promised interest over a defined period of time

Black -Scholes Model

a financial model used to determine the value of options based on the price fluctuations of underlying assets; this model assumes that prices follow a Brownian motion with constant drift and volatility; components include price variation, time value of money, option strike price, and time to expiration

balance sheet

a financial statement on a given date that subtracts liabilities from assets and shows either a positive or negative net worth;

Annuity

a finite series of periodic cash flows

Annuity Due

a finite series of periodic cash flows which the first cash flow begins immediately

bar chart

a graphical illustration based on frequency distribution ; for purposes of technical analysis a bar chart is an extension of a line chart and includes vertical lines representing prices ( data points with the opening, closing, high and low prices of the day

Absolute Deviation

a measure of the difference between some point and another point. : Typically the Difference between a central value such as the MEAN ( average) and another point

American Depository Receipt (ADR)

a negotiable certificate or note issued by a U.S bank representing ownership of shares in a foreign stock that is traded on U.S. exchanges; & they are denominated in in U.S, dollars

buy and hold

a passive investment strategy in which investments are bought and held for the long term and where no rebalancing takes place, while not considered an appropriate strategy by most financial professionals, a buy and hold strategy does have tax benefits

call provision

a provision in a bond offering that allows the original issuer to buyback ("redeem") portions of the offering at predetermined times and prices; all else being equal; callable bonds pay higher yield given this feature

Commodities

a standard good that can be interchanged for another ( "fungible"), as long as it meets the specifications of the particular good; they are used as inputs in the production of various goods or services

Active management

a strategy or approach to investing where the manager seeks to beat a benchmark through active or regular trading or investing

Arms ( TRIN ) Index

a technical analysis tool, also referred ti as the " TRIN" ( traders index), compares advancing and declining stocks and trading volume as an indicator of overall market sentiment; used as a predictor of future price movements

Capital Asset Pricing Model (CAPM)

a theoretical model that attempts to explain the relationship between risk and expected returns, the model holds that investors should be compensated for both the time value of money and risk taken; the CAPM formula allows one to calculate the expected return of an asset= (risk - risk free) + (market premium)* beta of the asset

basis point

a unit of measure equal to one, one hundredth ( 1/100th) of one percent EXAMPLE 1.00%= 100 basis points; .80%= 80 bp.

Angel Investor

a wealth investor who provides start up capital for businesses usually in exchange equity ownership or convertible debt.

Accounts Receivable Turnover ratio

accounting measure used to determine a company's effectiveness in extending credit and collecting debts; THE LARGER the ratio the Better a company is at turning sales into actual cash.

Accumulators ( investor type)

active investors who are often entrepreneurial and the first generation to create wealth, they can often be even more strong- willed and confident than independent investors , often have a higher tolerance for risk, subject to overconfidence, less self control, affinity bias, and illusion of control

Active Share ( Study or research )

active share represents the percentage of company stock held in a mutual fund or portfolio that differs from the composition of an applicable index or benchmark; Preliminary conclusions indicate the higher the active share the higher the performance, ( ex: active management is adding value) this research is often debated.

backfill bias

also called "INSTANT HISTORY BIAS" occurs when only new, successful funds report their performance and funds with poor results choose not to report until after they have achieved relative success( sometimes many years after the fact); note- performance reporting is optional for most hedge funds.

Capitol Allocation Line (CML)

also called the "reward to variability ratio" this line represents all possible combinations of risk free and risky assets; represents possible returns by taking on different levels of risk

autocorrelation

also known as " SERIAL CORRELATION" and " Lagged Correlation"; measures the correlation between values at different points in time; mathematical representation of the degree of similarity between a given time series and a alleged version over successive time intervals.

balance of payments

an accounting of all transactions between the country's residents and non-residents which includes income, goods and services, current account includes goods, services, income and transfers; the capital account includes financial instrument transactions

Annual Percentage Yield (APY)

an effective rate that considers the frequency by which interest is compounded within a year.

Affinity bias

an emotional bias where investors make decisions based on how they believe a product or service reflects their values;

Asset Location

an exercise in which investors place certain assets and investments, based on tax status and preferences, into different accounts ( e.g. taxable , tax deferred , or tax exempt) in order to minimize taxes during the growth and distribution phases of each account.

Arbitrage

an opportunity to earn profit without risk and with no net investment of money: Example : buying an undervalued asset while simultaneously selling ( short) an overvalued and equivalent asset

Collar

an options based hedge that involves selling ( writing ) an out of the money call and buying an out of the money put, this strategy is intended to lock in profits buy buying downside protection and calls sold are to generate income to help pay for this downside protection, a properly executed collar preserves capital and holding period of low cost basis stock.

capital gain

broadly defined as an increase in the value of a capital asset above the purchase price ; for tax purposes capital gains are not "realized" until the asset is sold and capital gains are not "recognized" for tax purposes until tax is triggered; ( a gain may be realized but not recognized)

bond equivalent yield ( BEY)

calculation that recharacterizes yield ( e.g semi annual, quarterly, monthly) into an annual yield

Arithmetic average

computed as the sum of all the numbers in a set or series divided by the number ( or count) in the set or series ; it does not take compounding into consideration, it is commonly referred to as the SIMPLE average or Mean

Accredited Investor

defined by the SEC ( Securities and Exchange) are considered financially sophisticated and do not need certain protections or mandatory disclosures. Must have $200,000 of income / yr. or more than $300,00 if joint income in each of the last two years, or have a net worth > $1,000,000

bear market

general market condition where prices are falling and pessimism persist, some consider a bear market to exist once prices have fallen by at least 20% over 2 or more months

bull market

general market condition where prices are rising and optimism persists

Examples of Alternative Investments

hedge funds, real estate, commodities , futures,& derivatives

long term gains

in the US capital gains are considered short term gains if the asset is sold after 1 year from purchase

short term gains

in the US capital gains are considered short term gains if the asset is sold with in 1 year from purchase

Affinity bias example

individuals that are prone to purchase stocks that reflect their self image

Alpha

is the risk-adjusted return; also considered the value added by the investment manager through security selection or market timing ;

Alternative Investments

loosely defined as any investment not considered traditional such as stock or bond, or cash; typically exhibit illiquidity, less regulation, lack of transparency , and high fees and expenses

Appraisal Ratio

measures a managers stock selection ability by dividing the portfolio alpha by the specific risk ( unsystematic risk ) of those securities

beta ( coefficient)

measures systematic ( market) risk based on the covariance of an assets return with the markets return; considered to be a measure of volatility; used in the Capital Asset Pricing Model ( CAPM)

Allocation drift

occurs when a target allocation to various asset classes shifts

American Options

option contracts (financial derivatives) that may be exercised at any time doing their contracted lives; most options that are traded on exchanges are American Options

common stock

ownership interest in a corporation represented by shares of stock; common stock shareholders, receive the right to elect a board of directors and vote on corporate policy; common stock shareholders are last in the order of those receiving assets upon corporate liquidation; the higher risk of owning common shares leads these shares to outperform corporate bonds and preferred stock of the same company

collinearity

refers to the relationship between two explanatory variables, exists when the correlation between 2 variables is so strong it is difficult to accurately calculate their individual coefficients

Alpha (also known as)

return in excess of the required rate of return

call (prepayment risk)

risk a bondholder bears, given that the issuer ( borrower) could payoff the debt or redeem the bonds at certain times and prices regardless of the desires of the bondholder, this risk can be factored into both market price and duration calculations

Arbitrage Pricing Theory (APT)

seeks to explain security returns beyond the usual metrics by introducing risk factors such as expected return, sector and systematic factors, while far more expansive than CAPM given the flexibility of the model, it is limited in accuracy because it can not measure unanticipated changes in the variables

Shareholder Equity

term used by a company that indicates Net worth

bond premium

the amount above par value at which something trades; bonds usually trade at a premium when interest rates have declined in relation to the coupon rate

bond discount

the amount below value at which something trades; occasionally , for various reasons, bonds are issued at a discount ( eg original issue discount bonds), but most often discounts refer to market prices below par value.

Annual Percentage Rate (APR)

the annual rate charged to a borrower that includes the actual costs of the loan over the term of the loan including any fees, costs, or expenses associated with the transaction.

bond yield spread

the difference between yields based on their maturity or credit quality; ex: a 3% corporate and a 2% gov't bond would have a 1% spread

book value per share

the dollar amount of a company's book value divided the number of outstanding shares; measures the intrinsic or theoretical value per share

after-tax return

the net investment return one receives after deducting the impact of all taxes (income tax, capital gains tax, tax on dividends, etc.) taken or expected

Compound Interest

the payment of interest on both principal amount and any accumulated interest

Asset Allocation

the process of determining what percentage of a portfolio should be placed in various types of assets ; an investment strategy that seeks to prudently balance risk and return by positioning assets based on an investors : GOALS, RISK TOLERANCE, and TIME HORIZON

backtesting

the process of going back in time to test the results of an investment strategy or trade ex-post ( after the fact)

book value

the value at which an asset or liability is carried on a balance sheet, value of company = assets - intangible assets - liabilities

capital market line (CML)

this line can be found in the Capital Asset Pricing Model (CAPM) and illustrates rates of return for efficient portfolios determined by the risk free rate and the level of risk as represented by standard deviation; the CML is illustrated by drawing a tangent line from the intercept point on the efficient frontier to the point where the expected return equals the risk free rate; the CML is considered an improvement to the efficient frontier because it adds the risk free asset to the portfolio; theoretically there can be no returns above the CML

commercial paper

unsecured hört- term debt obligations issued by corporations with maturities of less than 1 year .