A

Absolute return

Also referred to as the total return, the absolute return measures the gain or loss experienced by an asset or portfolio independent of any benchmark. The goal of an absolute-return fund is to achieve positive returns regardless of market conditions and cycles.

Active management

An approach to investing in which the portfolio manager seeks to outperform a given benchmark portfolio such as passively managed index funds.

Active managers rely on analytical research, forecasts, and their own judgment and experience in making investment decisions on what securities to buy, hold and sell. The opposite of active management is passive management, better known as “indexing.”

Alpha

Alpha, sometimes called the ‘active return’ on an investment, gauges the performance of an investment against a market index or benchmark which is considered to represent the market’s movement as a whole.

Asset class

An asset class is a group of securities or investments that exhibits similar characteristics and tend to behave similarly under different market conditions. The three main asset classes are equities (such as stocks); fixed income (such as bonds); and cash equivalents. Some investment professionals typically consider real estate, commodities, private equity and derivatives as alternative asset classes.

 

B

Benchmark

A benchmark is a standard against which the performance of a security, mutual fund or investment manager can be measured.

Bond

A bond is a fixed income investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are one of the three main generic asset classes, along with stocks (equities) and cash equivalents. The indebted entity (issuer) issues a bond that contractually states the interest rate that will be paid and the time at which the loaned funds (bond principal) must be returned (maturity date).

 

C

Consumer Price Index (CPI) and Core CPI

The Consumer Price Index (CPI) is a broad measure of inflation within an economy in relation to the cost of goods and services. That figure can have a significant impact on the value of a currency in relation to the currencies of other nations. The Core CPI excludes costs in the energy and food sectors, which tend to experience greater price volatility over time.

Credit Spread

A credit spread is the difference in yield between a Treasury bond and a debt security with the same maturity. To illustrate, if a 10-year Treasury bond has a yield of 2.54% while a 10-year corporate bond has a yield of 4.60%, then the corporate bond offers a spread of 206 basis points over the Treasury bond.

 

D

Debt-to-Equity ratio (D/E)

A solvency ratio calculated as total debt divided by total shareholders’ equity. It is most often used to gauge the extent to which a company is taking on debt as a means of leveraging.

Derivative

A financial instrument whose value depends on the value of some underlying asset or factor (e.g., a stock price, an interest rate, or an exchange rate). Derivatives can either be traded over-the-counter (OTC) or on an exchange.

Dividend Yield

A financial ratio that indicates how much a company pays out in dividends each year relative to its share price. Dividend yield is represented as a percentage and can be calculated as follow:
Dividend Yield = (Annual Dividend Per Share) / (Price Per Share).

 

E

Earnings Before Interest and Tax (EBIT)

Earnings before interest and tax, also called “operating earnings,” “operating profit,” or “operating income”, takes a company’s revenue, or earnings, and subtracts its cost of goods sold and operating expenses. If EBIT is unsatisfactory, the company will need to either increase its revenues, decrease its expenses or both to improve its performance.

EBITDA/EV

“EBITDA” stands for Earnings Before Interest, Taxes, Depreciation and Amortisation; EV stands for Enterprise Value.
The EBITDA/EV multiple is a financial ratio that measures a company’s Return On Investment (ROI). The EBITDA/EV ratio may be preferred over other measures of return because it is normalised for differences between companies and is commonly used to compare companies within an industry.

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. EPS is calculated as:

EPS = (Net Income – Dividends on Preferred Stock) / Average Outstanding Shares

Earnings yield

Earnings yield are the earnings per share for the most recent 12-month period divided by the current market price per share.

Enterprise Value (EV)

The Enterprise Value, or EV for short, is a measure of a company’s total value, often used as a more comprehensive alternative to equity market capitalization. Enterprise value is calculated as follow:

EV = market value of common stock + market value of preferred equity + market value of debt + minority interest – cash and investments.

Exchange-Traded Fund (ETF)

An ETF is an index-tracking investment vehicle that offers investors a proportionate share in a pool of stocks, bonds, commodities, and/or other assets. The key distinguishing feature of an ETF is that it trades throughout the day on an exchange (hence the term “exchange-traded”) at a market-determined price, just like a stock. In contrast, mutual funds are traded at a single price based on the Net Asset Value (NAV) that is calculated at the end of the trading day.
ETFs typically offer lower fees than actively managed funds since they merely track the value of something else and do not need any research analysts or portfolio managers to try to pick winning stocks.

 

F

Federal Funds Rate

The federal funds rate is the rate at which depository institutions (banks) lend reserve balances to other banks on an overnight basis and is set by the Federal Reserve. The fed funds rate is one of the most important interest rates in the U.S. economy since it affects monetary and financial conditions, which in turn have a bearing on critical aspects of the broad economy including employment, growth, and inflation.

Free cash flow (FCF)

Free cash flow (FCF) is a measure of a company’s financial performance. It represents the actual cash that would be available to the company’s investors after making all investments necessary to maintain the company as an ongoing enterprise (also referred to as free cash flow to the firm); the internally generated funds that can be distributed to the company’s investors (e.g., shareholders and bondholders) without impairing the value of the company.

Futures

Futures are financial contracts obligating the buyer to purchase an asset or the seller to sell an asset, such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset and trade on regulated exchanges (futures exchanges).

 

G

Government bond

A government bond is a debt security issued by a government to support government spending. Because government bonds of developed countries with a strong economy and high credit rating are backed by the credit of the government, default is unlikely and government bonds are considered essentially risk-free. Thus, government bonds create a benchmark against which riskier securities may be compared.

Gross Domestic Product (GDP) and Real GDP

The market value of all goods and services produced within the economy in a given period of time.
Real GDP is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year.

Gross exposure

Gross exposure is the absolute level of a fund’s investments. Gross exposure equals the value of both a fund’s long positions and short positions and can be expressed either in dollar terms or percentage terms. It is a measure that indicates total exposure to financial markets.

For example, a fund which has $100 million of capital has deployed $70 million in long positions and $25 million in short positions. The fund has a gross exposure of $95 million or 95% of the fund’s net asset value and a net exposure (the difference between its long and short positions) of $45 million or 45% of the fund’s net asset value.

 

H

Hedging

A general strategy usually thought of as reducing, if not eliminating, risk. Hedging is analogous to taking out an insurance policy.

 

I

Inflation

Inflation is an increase in the general level of prices and consequently a decrease in the purchasing power of a unit of currency.

Initial Public Offering (IPO)

The initial issuance of common stock registered for public trading by a formerly private corporation.

 

L

Leverage

In the context of corporate finance, leverage refers to the use of fixed costs within a company’s cost structure. Fixed costs that are operating costs (such as depreciation or rent) create operating leverage. Fixed costs that are financial costs (such as interest expense) create financial leverage.

Listed Investment Company (LIC)

LICs are pooled investment vehicles that are incorporated as companies and listed on a stock exchange such as the ASX in Australia.

Long-only strategy

A long-only strategy is an investment strategy that does not involve short-selling or derivatives. This means that the strategy invests in securities only with the expectation that their prices will rise.

Long/short strategy

A long/short strategy is an investing strategy of taking long positions in stocks that are expected to appreciate and short positions in stocks that are expected to decline. A long/short equity strategy seeks to minimise market exposure, while profiting from stock gains in the long positions, along with price declines in the short positions.

 

M

Macroeconomic factor

A factor related to the economy—such as inflation rate, industrial production, or economic sector membership.

 

N

Net Asset Value (NAV)

The Net Asset Value (NAV) is the value per share of a mutual fund or an exchange-traded fund (ETF) on a specific date or time. The per-share dollar amount of the fund is based on the total value of all the securities in its portfolio, any liabilities the fund has and the number of fund shares outstanding.

Net exposure

Net exposure is the percentage difference between a hedge fund’s long and short exposure. Also see gross exposure.

For example, a fund which has $100 million of capital has deployed $70 million in long positions and $25 million in short positions. The fund has a gross exposure of $95 million or 95% of the fund’s net asset value and a net exposure (the difference between its long and short positions) of $45 million or 45% of the fund’s net asset value.

Net Tangible Assets (NTA)

Net tangible assets are meant to represent a company’s total amount of physical assets minus any liabilities within the company.

 

O

Option

A financial instrument that gives one party the right, but not the obligation, to buy or sell an underlying asset from or to another party at a fixed price over a specific period of time.

Outperformance

Outperform is when an investment is expected to perform better than the return generated by a particular index or the overall market. Since the performance of many investments is compared to a benchmark index, outperform refers to generating a higher return than a particular benchmark over time.

 

P

Pairs trade

A basic long–short trade in which an investor is long and short equal currency amounts of two common stocks in a single industry.

Passive management

A buy-and-hold approach to investing in which an investor does not make portfolio changes based upon short-term expectations of changing market or security performance.

Price to Earnings Ratio (P/E)

The ratio of a company’s current share price to its per-share earnings. the price-earnings ratio indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings. A high P/E ratio suggests that the company’s share price is expensive relative to the company’s profits, which usually implies that investors are expecting the company’s future profits to grow quickly.

Purchasing Manager Index (PMI)

The Purchasing Managers’ Index is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

 

R

Real interest rate

A real interest rate is an interest rate that has been adjusted to remove the effects of inflation. The real interest rate is calculated as follow:
Real Interest Rate = Nominal Interest Rate – Inflation (Expected or Actual).

Recession

A broad-based economic downturn, conventionally defined as two successive quarterly declines in GDP.

Return on Equity (RoE)

Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. ROE is a profitability ratio expressed in percentage and calculated as:

Return on Equity = Net Income/Shareholder’s Equity.

Return On Investment (ROI)

ROI measures the amount of return on an investment relative to the investment’s cost. It is a ratio expressed in percentage and calculated as:

Return On Investment = (Gain from Investment – Cost of Investment) / Cost of Investment.

 

S

Sharpe Ratio

The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk. The Sharpe ratio has become the most widely used method for calculating risk-adjusted return. The ratio describes how much excess return you are receiving for the extra volatility that you endure for holding a riskier asset.

Short Selling or Shorting

A transaction utilised to generate a profit from the fall in price of a financial security such as shares, indices, commodities or other financial assets. Short selling is the sale of a security that is not owned by the seller or that the seller has borrowed. It may be prompted by the desire to hedge the downside risk of a long position in the same security or a related one.

Swap

A swap is a derivative contract through which two parties exchange financial instruments. Swaps do not trade on exchanges, and retail investors do not generally engage in swaps. Rather, swaps are over-the-counter contracts between businesses or financial institutions.

 

U

Underperformance

A fund or portfolio is said to have underperformed the market when its returns were lower than the returns of the market index that it uses as a benchmark.

Undertakings For The Collective Investment Of Transferable Securities (UCITS)

The Undertakings for the Collective Investment of Transferable Securities (UCITS) is a regulatory framework of the European Commission that creates a harmonized regime throughout Europe for the management and sale of mutual funds. UCITS funds can be registered in Europe and sold to investors worldwide using unified regulatory and investor protection requirements.

US 10-year treasury yields

It refers to the return on an investment in a US government 10-year debt obligation. The 10-year U.S. Treasury bond can help gauge investor sentiment. High investor confidence means falling prices and demand for the 10-year Treasury, and therefore a higher yield, because investors are confident they can find other investments with better returns. Prices rise and its yield decreases when confidence is low as there’s more demand for this safe investment.

 

V

Volatility

Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.

 

Y

Yield

The yield is the income return on an investment, such as the interest or dividends received from holding a particular security. The yield is usually expressed as an annual percentage rate based on the investment’s cost, current market value or face value.

Source: CFA Institute and Investopedia