Investments Dictionary

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Random Walk: Describes the notion that stock price changes are‐random and unpredictable.
Rate Anticipation Wwap: A switch made in response to forecasts of interest rates.
Real Assets, Financial Assets: Real assets are land, buildings, and equipment that are used to produce goods and services. Financial assets are claims such as securities to the income generated by real assets.
Real Interest Rate: The excess of the interest rate over the inflation rate. The growth rate of purchasing power derived from an investment.
Realized Compound Return: 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.
Rebalancing: Realigning the proportions of assets in a portfolio as needed.
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 its only evidence of ownership.
Regression Equation: An equation that describes the average relationship between a dependent variable and a set of explanatory variables.
Regret Avoidance: Notion from behavioral finance that individuals who make decisions that turn out badly will have more regret when that decision was more unconventional.
Reinvestment Rate Risk: The uncertainty surrounding the cumulative future value of reinvested bond coupon payments.
REIT: 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.
Remainderman: One who receives the principal of a trust when it is dissolved.
Replacement Cost: Cost to replace a firm's assets. AKA "Reproduction cost”.
Representativeness Bias: People seem to believe that a small sample is just as representative of a broad population as a large one and therefore infer patterns too quickly.
Repurchase Agreements (Repos): Short‐term, often overnight, sales of government securities with an agreement to repurchase the securities at a slightly higher price. A reverse repo is a purchase with an agreement to resell at a specified price on a future date.
Residual Claim: Refers to the fact that shareholders are at the bottom of the list of claimants to assets of a corporation in the event of failure or bankruptcy.
Residual Income: See economic value added (EVA).
Residuals: 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.
Resistance Level: A price level above which it is supposedly difficult for a stock or stock index to rise.
Return on Assets (ROA): A profitability ratio; earnings before interest and taxes divided by total assets.
Return on Equity (ROE): An accounting ratio of net profits divided by equity.
Return on Sales (ROS), or Profit Margin: The ratio of operating profits per dollar of sales (EBIT divided by sales).
Reversal Effect: The tendency of poorly performing stocks and well‐performing stocks in one period to experience reversals in following periods.
Reversing Trade: Entering the opposite side of a currently held futures position to close out the position.
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.
Risk Arbitrage: Speculation on perceived mispriced securities, usually in connection with merger and acquisition targets.
Risk Premium: An expected return in excess of that on risk-free securities. The premium provides compensation for the risk of an investment.
Risk-averse, Risk-neutral, Risk Lover: A risk‐averse investor will consider risky portfolios only if they provide compensation for risk via a risk premium. A risk‐neutral investor finds the level of risk irrelevant and considers only the expected return of risk prospects. A risk lover is willing to accept lower expected returns on prospects with higher amounts of risk.
Risk-free Asset: An asset with a certain rate of return; often taken to be short-term T-bills.
Risk-free Rate: The interest rate that can be earned with certainty.
Risk-return Trade-off: If an investor is willing to take on risk, there is the reward of higher expected returns.
Risky Asset: An asset with an uncertain rate of return.

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