Terminalogy Flashcards
(49 cards)
What is Alpha?
Measure of risk-adjusted performance. An alpha is usually generated by regressing the security or mutual fund’s excess return on the S&P 500 excess return. The beta adjusts for the risk (the slope coefficient). The alpha is the intercept. Example: Suppose the mutual fund has a return of 25%, and the short-term interest rate is 5% (excess return is 20%). During the same time the market excess return is 9%. Suppose the beta of the mutual fund is 2.0 (twice as risky as the S&P 500). The expected excess return given the risk is 2 x 9%=18%. The actual excess return is 20%. Hence, the alpha is 2% or 200 basis points. Alpha is also known as the Jensen Index. Related: Risk-adjusted return.
Alpha is also known as the Jensen Index and indicates performance relative to risk taken.
Define Arbitrage.
A transaction with zero cost initially but will end up with positive cash flow at the end.Arbitrage is a trading strategy that capitalizes on temporary price discrepancies between different markets for the same asset, resulting in a risk-free profit.
What is an Asset-Backed Security?
A security that is collateralized by loans, leases, receivables, or installment contracts on personal property, not real estate.
What does Beta measure?
The measure of a fund’s or a stock’s risk in relation to the market or an alternative benchmark.
What is the Black–Scholes Model?
A mathematical model of a financial market containing certain derivative investment instruments.
Define Bond.
A debt security where the issuer owes the holders a debt and is obliged to pay interest and/or repay the principal.
What is Bond Duration?
The sensitivity of the bond price to changes in the bond yield.
What is Bond Yield?
The break even rate to price the bond future cash flow versus its price today.
Who is a Broker?
An individual paid a commission for executing customer orders and acts as an intermediary between a buyer and seller.
What is a Call Option?
A financial contract giving the buyer the right to buy an underlying asset at a certain price by a certain date.
Define Coupon Bond.
A bond that pays periodic interest payments to the bondholder until maturity.
What is a Credit Default Swap (CDS)?
A financial agreement where the seller compensates the buyer in the event of a loan default.
What does Credit Exposure refer to?
The total amount of credit extended to a borrower by a lender.
Define Cross Gamma.
The rate of change of delta in one underlying to a change in the level of another underlying.
What is Currency Exchange Rate Exposure?
The influence of exchange rate movements on the value of a trade, firm, or sector of the economy.
What is a Dealer?
An entity that buys or sells a security for its own account.
Define Delta.
The number of units of an asset that should be purchased to hedge one unit of liability.
What is a Derivative Instrument?
A contract between two parties specifying conditions under which payments are to be made.
What is a Discount Factor?
The value of future one dollar today.
What does Drift refer to in finance?
The bias within the pricing of various derivative products, time-dependent.
Define Forward Contract.
A contract to buy or sell an asset at a specified future time at a price agreed upon today.
What is a Futures Contract?
A standardized contract to buy or sell a specified asset for a price agreed today with delivery at a future date.
What does Gamma measure?
The rate of change in delta with respect to changes in the underlying price.
Define Hedge.
An investment position intended to offset potential losses/gains from a companion investment.
