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Investments Dictionary

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Calendar Spread
Buy one option, and write another with a different expiration date.
Call Option
The right to buy an asset at a specified exercise price on or before a specified expiration date.
Call Protection
An initial period during which a callable bond may not be called.
Callable Bond
A bond that the issuer may repurchase at a given price in some specified period.
Capital Allocation Decision
Allocation of invested funds between risk‐free assets versus the risky portfolio.
Capital Allocation Line (CAL)
A graph showing all feasible risk‐return combinations of a risky and risk‐free asset.
Capital Gains
The amount by which the sale price of a security exceeds the purchase price.
Capital Market Line (CML)
A capital allocation line provided by the market index portfolio.
Capital Markets
Includes longer‐term, relatively riskier securities.
Cash Equivalents
Short-term money-market securities.
Cash Flow Matching
A form of immunization, matching cash flows from a bond portfolio with an obligation.
Cash Ratio
Measure of liquidity of a firm. Ratio of cash and marketable securities to current liabilities.
Cash Settlement
The provision of some futures contracts that requires not delivery of the underlying assets (as in agricultural futures) but settlement according to the cash value of the asset. certainty equivalent
Cash/Bond Selection
Asset allocation in which the choice is between short‐term cash equivalents and longer‐term bonds.
Certainty Equivalent Rate
The certain return providing the same utility as a risky portfolio.
Certificate of Deposit
A bank time deposit.
Established by exchanges to facilitate transfer of securities resulting from trades. For options and futures contracts, the clearinghouse may interpose itself as a middleman between two traders.
Closed-end (Mutual) Fund
A fund whose shares are traded through brokers at market prices; the fund will not redeem shares at their net asset value. The market price of the fund can differ from the net asset value.
An options strategy that brackets the value of a portfolio between two bounds.
A specific asset pledged against possible default on a bond. Mortgage bonds are backed by claims on property. Collateral trust bonds are backed by claims on other securities. Equipment obligation bonds are backed by claims on equipment.
Collateralized Debt Obligation (CDO)
A pool of loans sliced into several tranches with different levels of risk.
Collateralized Mortgage Obligation (CMO)
A mortgage pass‐through security that partitions cash·flows from underlying mortgages into classes called tranches that receive principal payments according to stipulated rules.
Commercial Paper
Short-term unsecured debt issued by large corporations.
Common Stock
Equities, or equity securities, issued as ownership shares in a publicly held corporation. Shareholders have voting rights and may receive dividends based on their proportionate ownership.
Comparison Universe
The collection of money managers of similar investment style used for assessing relative performance of a portfolio manager.
Complete Portfolio
The entire portfolio, including risky and risk‐free assets.
Conditional Tall Expectation
Expectation of a random variable conditional on its fa11ing below some threshold value. Often used as a measure of down‐side risk.
Confidence Index
Ratio of the yield of top‐rated corporate bonds to the yield on intermediate‐grade bonds.
Notion that investors are too slow to update their beliefs in response to new evidence.
Constant-growth Model
A form of the dividend discount model that assumes dividends will grow at a constant rate.
Contango Theory
Holds that the futures price must exceed the expected future spot price.
Contingent Claim
Claim whose value is directly dependent on or is contingent on the value of some underlying assets.
Contingent Immunization
A mixed passive-active strategy that immunizes a portfolio if necessary to guarantee a minimum acceptable return but otherwise allows active management.
Convergence Arbitrage
A bet that two or more prices are out of alignment and that profits can be made when the prices converge back to proper relationship.
Convergence Property
The convergence of futures prices and spot prices at the maturity of the futures contract.
Convertible Bond
A bond with an option allowing the bondholder to exchange the bond for a specified number of shares of common stock in the firm. A conversion ratio specifies the number of shares. The market conversion price is the current value of the shares for which the bond may be exchanged. The conversion premium is the excess of the bond's value over the conversion price.
The curvature of the price‐yield relationship of a bond.
Corporate Bonds
Long‐term debt issued by private corporations typically paying semiannual coupons and returning the face value of the bond at maturity.
Correlation Coefficient
A statistic in which the covariance is scaled to a value between -1 (perfect negative correlation) and + 1 (perfect positive correlation).
Cost-of-carry Relationship
See spot-futures-parity theorem.
Country Selection
A type of active international management that measures the contribution to performance attributable to investing in the better‐performing stock markets of the world.
Coupon Rate
A bond's interest payments per dollar of par value.
A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns move together. A negative covariance means they vary inversely.
Covered Call
A combination of selling a call on a stock together with buying the stock.
Covered Interest Arbitrage Relationship
See interest rate parity theorem.
Credit Default Swap
A derivative contract in which one party sells insurance concerning the credit risk of another firm.
Credit Enhancement
Purchase of the financial guarantee of a large insurance company to raise funds.
Credit Risk
Default risk.
Cross Hedge
Hedging a position in one asset using futures on another commodity.
Cumulative Abnormal Return
See abnormal return.
Currency Selection
Asset allocation in which the investor chooses among investments denominated in different currencies.
Current Ratio
A ratio representing the ability of the firm to pay off its current liabilities by liquidating current assets (current assets/current liabilities).
Current Yield
A bond's annual coupon payment divided by its price. Differs from yield to maturity.
Cyclical Industries
Industries with above‐average sensitivity to the state of the economy.

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