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Investments Dictionary

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Abnormal Return
Return on a stock beyond what would be predicted by market movements alone. Cumulative abnormal return (CAR) is the total abnormal return for the period surrounding an announcement or the release of information.
Accounting Earnings
Earnings of a firm as reported on its income statement.
Acid Test Ratio
A measure of liquidity similar to the current ratio except for exclusion of inventories (cash plus receivables divided by current liabilities).  AKA Quick Ratio.
Active Management
Attempts to achieve portfolio returns more than commensurate with risk, either by forecasting broad market trends or by identifying particular mispriced sectors of a market or securities in a market.
Active Portfolio
In the context of the Treynor‐Black model, the portfolio formed by mixing analyzed stocks of perceived nonzero alpha values. This portfolio is ultimately mixed with the passive market index portfolio.
Actuarial Assumptions
Estimates of future experience with respect to rates of mortality, disability, turnover, retirement, interest rate (also called the investment return or discount rate) and inflation. Demographic assumptions (rates of mortality, disability, turnover and retirement) are generally based on past experience, often modified for projected changes in conditions. Economic assumptions (interest rate and inflation) consist of an underlying rate in an inflation free environment plus a provision for a long term average rate of inflation.
Actuarial Cost Method
A mathematical budgeting procedure for allocating the dollar amount of the “actuarial present value of future plan benefits” between the actuarial present value of future normal costs and the actuarial accrued liability. Sometimes referred to as the “actuarial funding method”.
Actuarial Gain or Loss
The difference between actual experience and actuarial assumed experience during the period between two actuarial evaluation dates, as determined in accordance with a particular actuarial funding method.
Actuarial Liability
The actuarial liability is the present value of system benefits that have been allocated by an Actuarial Cost Method to past service as of the valuation date. It has also been the difference between the present value of future benefits and the present value of future normal costs. It is referred to by some actuaries as the “accrued liability”.
Actuarial Present Value
The amount of funds currently required to provide a payment or series of payments in the future. It is determined by discounting future payments at predetermined rates of interest and by probabilities of payment.
Actuarial Value of Assets
The actuarial value of assets equals the market value of assets adjusted according to a smoothing method. The smoothing method in Illinois law is intended to smooth out the short term volatility of investment returns in order to stabilize contribution rates and the funded status reported under GASB 25 and 27.
Adjusted Alphas
Forecasts for alpha that are modulated to account for statistical imprecision in the analyst's estimate.
Agency Poblem
Conflicts of interest among stockholders, bondholders, and managers.
The abnormal rate of return on a security in excess of what would be predicted by an equilibrium model like CAPM or APT.
American Depository Receipts (ADRs)
Domestically traded securities representing claims to shares of foreign stocks.
American Option
An American option can be exercised before and up to its expiration date. Compare with a European option, which can be exercised only on the expiration date.
Announcement Date
Date on which particular news concerning a given company is announced to the public. Used in event studies, which researchers use to evaluate the economic impact of events of interest.
Annual Percentage Rate (APR)
Interest rate is annualized using simple rather than compound interest.
Annual Required Contribution
The sum of the normal cost and amortization of the unfunded actuarial accrued liability over a period not to exceed 30 years. Currently required for accounting principles by the Government Accounting Standards Board (GASB).
Patterns of returns that seem to contradict the efficient market hypothesis.
Appraisal Ratio
The signal‐to‐noise ratio of an analyst's forecasts. The ratio of alpha to residual standard deviation.
A zero‐risk, zero‐net investment strategy that still generates profits.
Arbitrage Pricing Theory
An asset pricing theory that is derived from a factor model, using diversification and arbitrage arguments. The theory describes the relationship between expected returns on securities, given that there are no opportunities to create wealth through risk‐free arbitrage investments.
Asked Price
The price at which a dealer will sell a security.
Asset Allocation
Choosing among broad asset classes such as stocks versus bonds.
Asset Smoothing Method
A method of asset valuation where the annual fluctuation in the market value of assets is averaged over a period of years. See actuarial value of assets above.
At the Money
When the exercise price and asset price of an option are equal
Auction Market
A market where all traders in a good meet at one place to buy or sell an asset. The NYSE is an example.
Average Collection Period or Days' Receivables
The ratio of accounts receivable to sales, or the total amount of credit extended per dollar of daily sales (average AR/sales X 365).

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