Term
| Options on Futures Contracts |
|
Definition
| Called futures options. Just like options on stocks, except this is an option on a futures contract. Payoff diagrams are the same as they would be for stocks, and you still pay an option premium. |
|
|
Term
| Black-Scholes Option Pricing Model |
|
Definition
I can't put the formula in here, but Sanjay has it in his slides. There's no way I'm going to be able to memorize it though. |
|
|
Term
|
Definition
A convertible security gives the investor the right to convert one type of security into a stipulated amount of another (usually common stock) at the investor's discretion. Ex. a $1,000 bond can be converted into 19.048 shares of common stock. 19.048 would be the conversion ratio, and $1,000 / 19.048 would be the conversion price, or $52.50 in this example. At any time the investor can trade his bond in for 19.048 shares of common stock. |
|
|
Term
| Equity Portfolio Management (Active vs. Passive) |
|
Definition
Passive Management aims to replicate the performance of an index. The better a portfolio manager is, the more closely the performance of the portfolio will resemble that of the index.
|
|
|
Term
| (Passive) Completeness Funds |
|
Definition
completeness funds - not based on published indexes, but rather are used to balance out portfolios with actively managed portions that do not cover the whole market. |
|
|
Term
| (Passive) Full Replication Strategy |
|
Definition
full replication strategy - buying shares in stock in proportion to their weights in an index. this strategy has high transaction costs (many different stocks bought/sold), and dividend reinvestment results in high commissions when some firms pay small dividends at different times in the year
|
|
|
Term
| (Passive) Sampling Strategy |
|
Definition
sampling strategy - portfolio managers buy representative samples of an index. they buy shares of those companies heavily represented in an index, but choose the smaller stocks based on industry size and distribution to approximate the index while addressing difficulties with the full replication strategy With this method, there will be some tracking error, meaning the portfolio will not exactly track the market index. |
|
|
Term
(Passive) Quadratic Optimization (a.k.a. Programming) |
|
Definition
programming - historical information on price changes and correlations between securities are input to a computer program that determines the composition of a portfolio that will minimize tracking error with the benchmark Drawback is that this relies on historical correlation and if they change over time, portfolio performance may fail to closely track the index. |
|
|
Term
| (Passive) Dollar-cost averaging |
|
Definition
| dollar cost averaging - weighing the cost vs benefit of buying on stock upswing vs downswing. favors buying stocks when theyve gone down to hope for the ability to ride the wave back up |
|
|
Term
|
Definition
| The goal of active management is to earn a return that exceeds the return of a passive benchmark portfolio, net of transaction costs, on a risk adjusted basis. |
|
|
Term
|
Definition
| shifting funds among different equity sectors and industries (financial stocks, consumer cyclicals, durable goods, and so on) |
|
|
Term
|
Definition
| focusing on a particular investment style (large capitalization, small capitalization, value, growth, and so on) and seeking to add value compared to that style's benchmark. |
|
|
Term
|
Definition
| looking at individual stocks in an attempt to buy low and sell high regardless of industry, economic sector, or style. many times stock pickers base their selections on broad economic or market-based themes such as aging demographics, growing global trade, or technology. in some respect, all active management strategies involve some aspect of stock picking. |
|
|
Term
|
Definition
|
|
