Accrued Interest

Interest earned between the most recent interest payment and the present date but not yet paid to the lender.

Accredited investor

Refers to a person whose net worth, or joint net worth with a spouse, exceeds $1,000,000; or whose individual income exceeded $200,000 or whose joint income with a spouse exceeded $300,000 in each of the 2 most recent years and can be expected to meet that income in the current year. More details of the definitions for investors other that individuals are found in Regulation D of the Securities and Exchange Commission.

Acid test ratio

Also called the quick ratio, the ratio of current assets minus inventories, accruals, and prepaid items to current liabilities.

Active Risk

The risk (annualized standard deviation) of the active return. Also called the tracking error.

Actuals

The physical commodity underlying a futures contract.

Add-on Method

A method of paying interest where the interest is added onto the principal at maturity or interest payment dates.

Adjusted Futures Price

The cash-price equivalent reflected in the current futures price. This is calculated by taking the futures price times the conversion factor for the particular financial instrument (e.g., bond or note) being delivered.

Air pocket stock

A stock whose price drops precipitously, often on the unexpected news of poor results.

Agency basis

A means of compensating the broker of a program trade solely on the basis of commission established through bids submitted by various brokerage firms.

Agency incentive arrangement

A means of compensating the broker of a program trade using benchmark prices for issues to be traded in determining commissions or fees.

All Ordinaries Index

The major stock price index in Australia. The capitalization weighted index is made up of the largest 500 companies as measured by market capitalization that are listed on the Australian Stock Exchange. The index was developed with a base value of 500 as of 1979.

Alligator spread

The term describes a spread in the options market that generates such a large commission that the client is unlikely to make a profit even if the markets move as the investor anticipated.

Alpha

In a Jensen Index, a factor to represent the portfolio’s performance that diverges from its beta, representing a measure of the manager’s performance.

Alternative investments

Usually refers to investments in hedge funds. Many hedge funds pursue strategies that are uncommon relative to mutual funds. Examples of alternative investment strategies are: long–short equity, event driven, statistical arbitrage, fixed income arbitrage, convertible arbritage, short bias, global macro, and equity market neutral. May also refer to the high frequency style of commodity trading advisors who often employ technical and quantitative tools for intraday investments

American Depository Receipt (ADR)

The U.S. version of the International Depositary Receipt.

American option

An option that may be exercised at any time up to and including the expiration date. Related: European options

Amortization

The repayment of a loan by installments.

Annual fund operating expenses

For investment companies, the management fee and “other expenses,” including the expenses for maintaining shareholder records, providing shareholders with financial statements, and providing custodial and accounting services. For 12b-1 funds, selling and marketing costs are included.

Annual percentage rate (APR)

The periodic rate times the number of periods in a year. For example, a 5% quarterly return has an APR of 20%.

Annual percentage yield (APY)

The effective, or true annual rate of return. The APY is the rate actually earned or paid in one year, taking into account the effect of compounding. The APY is calculated by taking one plus the periodic rate, raising it to the number of periods in a year and then subtracting one. For example, a 1% per month rate has an APY of 12.68% (1.01^12 -1).

Annual rate of return

There are many ways of calculating the annual rate of return. If the rate of return is calculated on a monthly basis, we sometimes multiply this by 12 to express an annual rate of return. This is often called the annual percentage rate (APR). The annual percentage yield (APY) includes the effect of compoundinginterest.

Annuity

A regular periodic payment made by an insurance company to a policyholder for a specified period of time.

Annuity certain

An annuity that pays a specific amount on a monthly basis for a set amount of time.

Annuity due

An annuity with n payments, where the first payment is made at time t = 0, and the last payment is made at time t = n – 1.

Annuity factor

Present value of $1 paid for each of t periods.

Arbitrage

The simultaneous buying and selling of a security at two different prices in two different markets, resulting in profits without risk. Perfectly efficient markets present no arbitrage opportunities.

Arbitrage pricing theory (APT)

An alternative model to the capital asset pricing model developed by Stephen Ross and based purely on arbitrage arguments.

Arithmetic mean return

An average of the subperiod returns, calculated by summing the subperiod returns and dividing by the number of subperiods.

Arms index

Also known as a TRading INdex (TRIN). The index is usually calculated as the number of advancing issues divided by the number of declining issues. This, in turn, is divided by the advancing volume divided by the declining volume. If there is considerably more advancing volume relative to declining volume this will tend to reduce the index (i.e. increase the denominator). Hence, a value less than 1.0 is bullish while values greater than 1.0 indicate bearish demand. The index often is smoothed with a simple moving average.

Ask price

Also called “offer”. Indicates a willingness to sell a futures contract at a given price.

Assignment

The receipt of an exercise notice by an option writer (seller) that obligates him to sell (in the case of a call) or purchase (in the case of a put) the underlying security at the specified strike price.

Asset

Any possession that has value in an exchange.

Asset/equity ratio

The ratio of total assets to stockholders’ equity.

Asset/liability management

Also called surplus management, the task of managing funds of a financial institution to accomplish the two goals of a financial institution: (1) to earn an adequate return on funds invested and (2) to maintain a comfortable surplus of assets beyond liabilities.

Asset allocation decision

The decision regarding how the institution’s funds should be distributed among the major classes of assets in which it may invest.

Asset-backed securities

Securities backed by assets that are not mortgage loans. Examples include assets backed by automobile loans and credit card receivables.

Asset classes

Categories of assets, such as stocks, bonds, real estate, and foreign securities.

Asset/equity ratio

The ratio of total assets to stockholder equity.

Asset stripper

A corporate raider (company A) that takes over a target company (company B) in order to sell large assets of company B to repay debt. Company A calculates that the net, selling off the assets and paying off the debt, will leave the raider with assets that are worth more than what it paid for company B.

Asset swap

An interest rate swap used to alter the cash flow characteristics of an institution’s assets so as to provide a better match with its liabilities.

Asset turnover

The ratio of net sales to total assets.

Asymmetric volatility

Phenomenon that volatility is higher in down markets than in up markets.

At-the-Money

An option which has a strike price that is nearest to the underlying futures price.

At risk

The exposure to the danger of economic loss. Frequently used in the context of claiming tax deductions. For example, a person can claim a tax deduction in a limited partnership if the taxpayer can show it is at risk of never realizing a profit and of losing its initial investment.

Automatic Exercise

A protection procedure whereby the Options Clearing Corporation attempts to protect the holder of an expiring in-the-money option by automatically exercising the option on behalf of the holder.

Attribute bias

The tendency of stocks preferred by the dividend discount model to share certain equity attributes such as low price-earnings ratios, high dividends yield, high book-value ratio, or membership in a particular industry sector.

Average (across-day) measures

An estimation of price that uses the average or representative price or a large number of trades.

Average Down

To buy more of a security at a lower price, thereby reducing the holder’s average cost. (Average Up: to buy more at a higher price.)