Random variable A function that assigns a real number to each and every possible outcome of a random experiment. Random walk Theory that stock price changes from day to day are at random; the changes are independent of each other and have the same probability distribution. Many believers of the random walk theory believe that ...

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Random variable
A function that assigns a real number to each and every possible outcome of a random experiment.

Random walk
Theory that stock price changes from day to day are at random; the changes are independent of each other and have the same probability distribution. Many believers of the random walk theory believe that it is impossible to outperform the market consistently without taking additional risk.

Randomized strategy
A strategy of introducing into the decision-making process a random element that is designed to reduce the information content of the decision-maker’s observed choices.

Range
The high and low prices, or high and low bids and offers recorded during a specified time.

Range Accrual Option
An Option that accrues value for each day that the index rate remains within the specified range. See Range Note, Hamster Option.

Range Binary Option
An Option that pays off a fixed amount at expiration if and only if the underlying price remains in the range the option’s entire life. .

Range forward
A forward exchange rate contract that places upper and lower bounds on the cost of foreign exchange.

Rate anticipation swaps
An exchange of bonds in a portfolio for new bonds that will achieve the target portfolio duration, based on the investor’s assumptions about future changes in interest rates.

Rate of interest
The rate, as a proportion of the principal, at which interest is computed.

Rate of return ratios
Ratios that are designed to measure the profitability of the firm in relation to various measures of the funds invested in the firm.

Rate risk
In banking, the risk that profits may decline or losses occur because a rise in interest rates forces up the cost of funding fixed-rate loans or other fixed-rate assets.

Ratings
An evaluation of credit quality Moody’s, S&P, and Fitch Investors Service give to companies used by investors and analysts.

Rational expectations
The idea that people rationally anticipate the future and respond to what they see ahead.

Raw material supply agreement
As used in connection with project financing, an agreement to furnish a specified amount per period of a specified raw material.

Reaction
A decline in prices following an advance. Opposite of rally.

Real assets
Identifiable assets, such as buildings, equipment, patents, and trademarks, as distinguished from a financial obligation.

Real capital
Wealth that can be represented in financial terms, such as savings account balances, financial securities, and real estate.

Real cash flow
A cash flow is expressed in real terms if the current, or date 0, purchasing power of the cash flow is given.

Real exchange rates
Exchange rates that have been adjusted for the inflation differential between two countries.

Real interest rate
The rate of interest excluding the effect of inflation; that is, the rate that is earned in terms of constant-purchasing-power dollars. Interest rate expressed in terms of real goods, i.e. nominal interest rate adjusted for inflation.

Real market
The bid and offer prices at which a dealer could do “size.” Quotes in the brokers market may reflect not the real market, but pictures painted by dealers playing trading games.

Real time
A real time stock or bond quote is one that states a security’s most recent offer to sell or bid (buy). A delayed quote shows the same bid and ask prices 15 minutes and sometimes 20 minutes after a trade takes place.

Realized compound yield
Yield assuming that coupon payments are invested at the going market interest rate at the time of their receipt and rolled over until the bond matures.

Realized return
The return that is actually earned over a given time period.

Rebalancing
Realigning the proportions of assets in a portfolio as needed.

Receivables balance fractions
The percentage of a month’s sales that remain uncollected (and part of accounts receivable) at the end of succeeding months.

Receivables turnover ratio
Total operating revenues divided by average receivables. Used to measure how effectively a firm is managing its accounts receivable.

Receiver
A bankruptcy practitioner appointed by secured creditors in the United Kingdom to oversee the repayment of debts.

Reclamation
A claim for the right to return or the right to demand the return of a security that has been previously accepted as a result of bad delivery or other irregularities in the delivery and settlement process.

Recourse
Term describing a type of loan. If a loan is with recourse, the lender has a general claim against the parent company if the collateral is insufficient to repay the debt.

Redeemable
Eligible for redemption under the terms of the indenture.

Redemption charge
The commission charged by a mutual fund when redeeming shares. For example, a 2% redemption charge (also called a “back end load”) on the sale of shares valued at $1000 will result in payment of $980 (or 98% of the value) to the investor. This charge may decrease or be eliminated as shares are held for longer time periods.

Redemption cushion
The percentage by which the conversion value of a convertible security exceeds the redemption price (strike price).

Reference rate
A benchmark ‘interest rate (such as LIBOR), used to specify conditions of an interest rate swap or an interest rate agreement.

Refunded bond
Also called a prerefunded bond, one that originally may have been issued as a general obligation or revenue bond but that is now secured by an “escrow fund” consisting entirely of direct U.S. government obligations that are sufficient for paying the bondholders.

Refunding
The redemption of a bond with proceeds received from issuing lower-cost debt obligations ranking equal to or superior to the debt to be redeemed.

Registered bond
A bond whose issuer records ownership and interest payments. Differs from a bearer bond which is traded without record of ownership and whose possession is the only evidence of ownership.

Registered representative
A person registered with the CFTC who is employed by, and soliciting business for, a commission house or futures commission merchant.

Registered trader
A member of the exchange who executes frequent trades for his or her own account.

Registrar
Financial institution appointed to record issue and ownership of company securities.
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Regression analysis
A statistical technique that can be used to estimate relationships between variables.

Regular way settlement
In the money and bond markets, the regular basis on which some security trades are settled is that the delivery of the securities purchased is made against payment in Fed funds on the day following the transaction.

Regulatory accounting procedures
Accounting principals required by the FHLB that allow S&Ls to elect annually to defer gains and losses on the sale of assets and amortize these deferrals over the average life of the asset sold.

Regulatory pricing risk
Risk that arises when regulators restrict the premium rates that insurance companies can charge.

Regulatory surplus
The surplus as measured using regulatory accounting principles (RAP) which may allow the non-market valuation of assets or liabilities and which may be materially different from economic surplus.

Reinvestment rate
The rate at which an investor assumes interest payments made on a debt security can be reinvested over the life of that security.

Reinvestment risk
The risk that proceeds received in the future will have to be reinvested at a lower potential interest rate.

Reinvoicing center
A central financial subsidiary used by an MNC to reduce transaction exposure by having all home country exports billed in the home currency and then reinvoiced to each operating affililate in that affiliate’s local currency. It can also be used as a netting center.

REIT (real estate investment trust)
Real estate investment trust, which is similar to a closed-end mutual fund. REITs invest in real estate or loans secured by real estate and issue shares in such investments.

Relative purchasing power parity (RPPP)
Idea that the rate of change in the price level of commodities in one country relative to the price level in another determines the rate of change of the exchange rate between the two countries’ currencies.

Relative strength
A stock’s price movement over the past year as compared to a market index (the S&P 500). Value below 1.0 means the stock shows relative weakness in price movement (underperformed the market); a value above 1.0 means the stock shows relative strength over the 1-year period. Equation for Relative Strength: [current stock price/year-ago stock price] [current S&P 500/year-ago S&P 500]

Relative value
The attractiveness measured in terms of risk, liquidity, and return of one instrument relative to another, or for a given instrument, of one maturity relative to another.

Relative yield spread
The ratio of the yield spread to the yield level.

Remainderman
One who receives the principal of a trust when it is dissolved.

Remaining maturity
The length of time remaining until a bond’s maturity.

Remaining principal balance
The amount of principal dollars remaining to be paid under the mortgage as of a given point in time.

Remote disbursement
Technique that involves writing checks drawn on banks in remote locations so as to increase disbursement float.

Reoffering yield
In a purchase and sale, the yield to maturity at which the underwriter offers to sell the bonds to investors.

Reorganization
Creating a plan to restructure a debtor’s business and restore its financial health.

Replicating portfolio
A portfolio constructed to match an index or benchmark.

Repo
A agreement in which one party sells a security to another party and agrees to repurchase it on a specified date for a specified price. See: repurchase agreement.

Reported factor
The pool factor as reported by the bond buyer for a given amortization period.

Repurchase agreement
An agreement with a commitment by the seller (dealer) to buy a security back from the purchaser (customer) at a specified price at a designated future date. Also called a repo, it represents a collateralized short-term loan, where the collateral may be a Treasury security, money market instrument, federal agency security, or mortgage-backed security. From the purchaser (customer) perspective, the deal is reported as a reverse Repo.

Repurchase of stock
Device to pay cash to firm’s shareholders that provides more preferable tax treatment for shareholders than dividends. Treasury stock is the name given to previously issued stock that has been repurchased by the firm. A repurchase is achieved through either a dutch auction, open market, or tender offer.

Required reserves
The dollar amounts based on reserve ratios that banks are required to keep on deposit at a Federal Reserve Bank.

Required return
The minimum expected return you would require to be willing to purchase the asset, that is, to make the investment.

Required yield
Generally referring to bonds, the yield required by the marketplace to match available returns for financial instruments with comparable risk.

Reserve
An accounting entry that properly reflects the contingent liabilities.

Reserve currency
A foreign currency held by a central bank or monetary authority for the purposes of exchange intervention and the settlement of inter-governmental claims.

Reserve ratios
Specified percentages of deposits, established by the Federal Reserve Board, that banks must keep in a non-interest-bearing account at one of the twelve Federal Reserve Banks.

Reserve requirements
The percentage of different types of deposits that member banks are required to hold on deposit at the Fed.

Residuals
(1) Parts of stock returns not explained by the explanatory variable (the market-index return). They measure the impact of firm-specific events during a particular period. (2) Remainder cash flows generated by pool collateral and those needed to fund bonds supported by the collateral.

Residual dividend approach
An approach that suggests that a firm pay dividends if and only if acceptable investment opportunities for those funds are currently unavailable.

Residual losses
Lost wealth of the shareholders due to divergent behavior of the managers.

Residual method
A method of allocating the purchase price for the acquisition of another firm among the acquired assets.

Residual value
Usually refers to the value of a lessor’s property at the time the lease expires.

Resistance level
A price level above which it is supposedly difficult for a security or market to rise.

Restrictive covenants
Provisions that place constraints on the operations of borrowers, such as restrictions on working capital, fixed assets, future borrowing, and payment of dividend.

Retail
Individual and institutional customers as opposed to dealers and brokers.

Retail credit
Credit granted by a firm to consumers for the purchase of goods or services.

Retail investors individual investors
Small investors who commit capital for their personal account.

Retained earnings
Accounting earnings that are retained by the firm for reinvestment in its operations; earnings that are not paid out as dividends.

Retention rate
The percentage of present earnings held back or retained by a corporation, or one minus the dividend payout rate. Also called the retention ratio.

Retracement
A price movement in the opposite direction of the previous trend.

Return
The change in the value of a portfolio over an evaluation period, including any distributions made from the portfolio during that period.

Return on assets (ROA)
Indicator of profitability. Determined by dividing net income for the past 12 months by total average assets. Result is shown as a percentage. ROA can be decomposed into return on sales (net income/sales) multiplied by asset utilization (sales/assets).

Return on equity (ROE)
Indicator of profitability. Determined by dividing net income for the past 12 months by common stockholder equity (adjusted for stock splits). Result is shown as a percentage. Investors use ROE as a measure of how a company is using its money. ROE may be decomposed into return on assets (ROA) multiplied by financial leverage (total assets/total equity).

Return on investment (ROI)
Generally, book income as a proportion of net book value.

Return on total assets
The ratio of earnings available to common stockholders to total assets.

Return-to-maturity expectations
A variant of pure expectations theory which suggests that the return that an investor will realize by rolling over short-term bonds to some investment horizon will be the same as holding a zero-coupon bond with a maturity that is the same as that investment horizon.

Revaluation
An increase in the foreign exchange value of a currency that is pegged to other currencies or gold.

Revenue bond
A bond issued by a municipality to finance either a project or an enterprise where the issuer pledges to the bondholders the revenues generated by the operating projects financed, for instance, hospital revenue bonds and sewer revenue bonds.

Revenue fund
A fund accounting for all revenues from an enterprise financed by a municipal revenue bond.

Reverse price risk
A type of mortgage-pipeline risk that occurs when a lender commits to sell loans to an investor at rates prevailing at application but sets the note rates when the borrowers close. The lender is thus exposed to the risk of falling rates.

Reverse repo
In essence, refers to a repurchase agreement. From the customer’s perspective, the customer provides a collateralized loan to the seller.

Reverse stock split
A proportionate decrease in the number of shares, but not the value of shares of stock held by shareholders. Shareholders maintain the same percentage of equity as before the split. For example, a 1-for-3 split would result in stockholders owning 1 share for every 3 shares owned before the split. After the reverse split, the firm’s stock price is, in this example, worth three times the pre-reverse split price. A firm generally institutes a reverse split to boost its stock’s market price and attract investors.

Reversing trade
Entering the opposite side of a currently held futures position to close out the position.

Revolving credit agreement
A legal commitment wherein a bank promises to lend a customer up to a specified maximum amount during a specified period.

Revolving line of credit
A bank line of credit on which the customer pays a commitment fee and can take down and repay funds according to his needs. Normally the line involves a firm commitment from the bank for a period of several years.

Reward-to-volatility ratio
Ratio of excess return to portfolio standard deviation.

Riding the yield curve
Buying long-term bonds in anticipation of capital gains as yields fall with the declining maturity of the bonds.

Right
A short-lived (typically less than 90 days) call option for purchasing additional stock in a firm, issued by the firm to all its shareholders on a pro rata basis.

Rings
Trading arenas located on the floor of an exchange in which traders execute orders. Sometimes called a pit.

Risk
Typically defined as the standard deviation of the return on total investment. Degree of uncertainty of return on an asset.

Risk-adjusted profitability
A probability used to determine a “sure” expected value (sometimes called a certainty equivalent) that would be equivalent to the actual risky expected value.

Risk arbitrage
Speculation on perceived mispriced securities, usually in connection with merger and acquisition deals. Mike Donatelli, John Demasi, Frank Cohane, and Scott Lewis are all hardcore arbs. They had a huge BT/MCI position in the summer of 1997, and came out smelling like roses.

Risk averse
A risk-averse investor is one who, when faced with two investments with the same expected return but two different risks, prefers the one with the lower risk.

Risk classes
Groups of projects that have approximately the same amount of risk.

Risk controlled arbitrage
A self-funding, self-hedged series of transactions that generally utilize mortgage securities as the primary assets.

Risk indexes
Categories of risk used to calculate fundamental beta, including (1) market variability, (2) earnings variability, (3) low valuation, (4) immaturity and smallness, (5) growth orientation, and (6) financial risk.

Risk lover
A person willing to accept lower expected returns on prospects with higher amounts of risk.

Risk management
The process of identifying and evaluating risks and selecting and managing techniques to adapt to risk exposures.

Risk neutral
Insensitive to risk.

Risk prone
Willing to pay money to transfer risk from others.

Risk premium
The reward for holding the risky market portfolio rather than the risk-free asset. The spread between Treasury and non-Treasury bonds of comparable maturity.

Risk premium approach
The most common approach for tactical asset allocation to determine the relative valuation of asset classes based on expected returns.

Riskless rate
The rate earned on a riskless investment, typically the rate earned on the 90-day U.S. Treasury Bill.

Riskless rate of return
The rate earned on a riskless asset.

Riskless arbitrage
The simultaneous purchase and sale of the same asset to yield a profit.

Riskless or risk-free asset
An asset whose future return is known today with certainty. The risk free asset is commonly defined as short-term obligations of the U.S. government.

Risky asset
An asset whose future return is uncertain.

Risk-adjusted return
Return earned on an asset normalized for the amount of risk associated with that asset.

Risk-free asset
An asset whose future return is known today with certainty.

Risk-free rate
The rate earned on a riskless asset.

Roll over
Reinvest funds received from a maturing security in a new issue of the same or a similar security.

Rollover
Most term loans in the Euromarket are made on a rollover basis, which means that the loan is periodically repriced at an agreed spread over the appropriate, currently prevailing LIBO rate.

Round lot
A trading order typically of 100 shares of a stock or some multiple of 100. Related: odd lot.

Round-trip transactions costs
Costs of completing a transaction, including commissions, market impact costs, and taxes.

Round-turn
Procedure by which the Long or short position of an individual is offset by an opposite transaction or by accepting or making delivery of the actual financial instrument or physical commodity.

R squared (R2)
Square of the correlation coefficientthe proportion of the variability in one series that can be explained by the variability of one or more other series.

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