1 1 ABC of Mutual Fund

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ABC of Mutual Fund: Part 2

Terms used in Mutual Fund12/5/2009

Manish Y Jha



ABC of Mutual Fund

Part - 2

117. Date of Record: The date, established quarterly by a corporation'sboard of directors, on which the stockholders of record are determined forthe purpose of paying a cash or stock dividend.

118. Day Order: A trading order for which the broker will attempt to fill theorder only during the day on which it was entered.

119. Day-of-the-Week-Effect: (alternatively, Weekend Effect): Anempirical regularity whereby stocks returns appear to be lower on Mondaysthan on other days of the week.

120. Dealer (alternatively, Market-Maker): A person who facilitates thetrading of financial assets by maintaining an inventory in particularsecurities. The dealer buys for and sells from this inventory, profiting fromthe difference in the buying and selling prices.

121. Dealer's Spread: The bid-ask spread quoted by a security leader.

122. Debenture: A bond that is not secured by specific property.

123. Debit Balance: The dollar amount borrowed from a broker as a resultof the margin purchase.

124. Debt Refunding: The issuance of new debt for the purpose of payingoff currently maturing debt.

125. Dedicated Portfolio: A portfolio of bonds that provides its owner withcash inflows that are matched against a specific stream of cash outflows.

126. Default Premium: The difference between the promised and expectedyield-to-maturity on a bond arising from the possibility that the bond issuermight default on the bond.

127. Defensive Stocks: Stocks that have betas less than 1.

128. Delist: The process of removing a security's eligibility for trading on anorganized security exchange.



129. Demand-to-Buy-Schedule: A description of the quantities of thesecurity that an investor is prepared to purchase at alternative prices.

130. Demand Deposit: A checking account at a financial institution.

131. Depository Trust Company: A central computerized depository forsecurities registered in the names of member firms. Member's securitycertificates are immobilized and computerized records of ownership aremaintained. This arrangement permits electronic transfer of the securitiesfrom one member to the another as trades are conducted between themembers' clients.

132. Discount Broker: An organization that offers a limited range of brokerage services and charges fee substantially below those of brokeragefirms that provide a full range of services.

133. Discount Factor: The present value of $1 to be received in a specified

number of years.

134. Discounting: The process of calculating the present value of a givenstream of cash flows.

135. Discount Rate: The interest rate used in calculating the present valueof future cash flows. The discount rate reflects not only the time value of money but also the riskiness of the cash flows.

135. Discretionary Order: A trading order that permits the broker to setthe specifications for the order.

136. Disintermediation: A pattern of funds flow whereby investorswithdraw funds from financial intermediaries, such as bank and savings andloans, because market interest rates exceed the maximum interest rates thatthese organizations are permitted to pay. The investors reinvest their fundsin financial assets that pay interest rates not subject to ceilings.

137. Distribution (12b-1) Fee: An annual fee charged by a mutual fund toits shareholders to pay for advertising, promoting and selling of the fund tonew investors.

138. Diversification: The process of adding securities to a portfolio in orderto reduce the portfolio's unique risk, and thereby, the portfolio's total risk.

139. Dividend Decision: The process of determining the amount of dividends that a corporation will pay its shareholders.

140. Dividend Discount Model: The term used for the capitalization of income method of valuation as applied to common stocks. All variants of



dividend discount model assume that the intrinsic value of a share of common stock is equal to the discounted value of the dividend forecast to bepaid on the stock.

141. Dividends: Cash payments made to stockholders by the corporation.

142. Dividend Yield: The current annualized dividend paid on a share of common stock, expressed a percentage of the current market price of thecorporation's common stock.

143. Dollar-Weighted Return: A method of measuring the performance of a portfolio over a particular period of time. It is a discount rate that makesthe present value of cash flows into and out of the portfolio, as well as theportfolio's ending value, equal to the portfolio's beginning value.

144. Domestic Return: The return on an investment in a foreign financialasset, excluding the impact of exchange rate changes.

145. Double Auction: Bidding among both buyers and sellers for a securitythat may occur when the specialist's bid-ask spread is large enough to permitsales at one or more prices within the spread.

146. Duration: A measure of the average maturity of the stream of thepayments generated by a financial asset. Mathematically, duration is theweighted average of the lengths of time until the asset's remaining paymentsare made. The weights in this calculation are the proportion of the asset'stotal present value represented by the present value of the respective cashflows.

E

147. Earnings per Share: A corporation's accounting earnings divided bythe number of its common shares outstanding.

148. Earnings-Price Ratio: The reciprocal of the price-earnings ratio.

149. Econometric Model: A statistical model designed to explain andforecast certain economic phenomena.

150. Economic Earnings: The change in the economic value of the firmplus dividends paid to shareholders.

151. Economic Value of the Firm: The aggregate market value of allsecurities issued by the firm.

152. Effective Duration: A measure of a bond's duration that accounts forthe ability of either the bond's issuer or the bondholders to cause the actual



stream of cash payments to differ from that which would be received if thebond were paid off as promised over its entire life.

153. Efficient Diversification: The process of creating diversification in aportfolio by selecting securities in a manner that explicitly considers thestandard deviation and correlation of the securities.

154. Efficient Market: A market for securities in which every security'sprice equals its investment value at all times, implying that a specified set of information if fully and immediately reflected in market prices.

155. Efficient Portfolio: A portfolio within the feasible set that offersinvestors both maximum expected return for varying levels of risk andminimum risk for varying levels of expected return.

156. Efficient Set (Frontier): The set of efficient portfolios.

157. Efficient Set Theorem: The proposition that investors will choose theirportfolios only from the set of efficient portfolios.

158. Emerging Markets: Financial markets in countries that have arelatively low level of per capita gross domestic product, improving politicaland economic stability, a currency that is convertible into Western countries'currencies and securities available for investment by foreigners.

159. Empirical Regularities: Differences in return on securities that occurwith regularity from period to period.

160. Endogenous Variable: In the context of an econometric model, aneconomic variable that represents the economic phenomena explained by themodel.

161. Equal-Weighted Market Index: A market index in which all thecomponent securities contribute equally to the value of the index, regardlessof the various attributes of those securities.

162. Equilibrium Expected Return: The expected return on a securityassuming that the security is correctly priced by the market. This "fair"return is determined by an appropriate asset pricing model.

163. Equipment Obligation (alternatively, Equipment Trust Certificate):A bond that is backed by specific pieces of equipment that, if necessary, canbe readily sold and delivered to a new owner.

164. Equity Premium: The difference between the expected rate of returnon common stock and the risk free return.



165. Equity Swap: A contract between two counter parties wherein onepays the other a fixed stream of cash flows and in return receives a varyingstream whose cash flows are regularly reset on the basis of the performanceof a given stock or a given stock market index.

166. Equivalent Yield: The annualized yield-to-maturity on a fixed-incomesecurity sold on a discount basis.

167. Eurobond: A bond that is offered outside of the country of theborrower and usually outside of the country in whose currency the security isdenominated.

168. Eurodollar Certificate of Deposit: A certificate of depositdenominated by U.S. dollars and issued by banks domiciled outside of theUnited States.

169. European Option: An option that can be exercised only on its

expiration date.

170. Excess Return: The difference between the return on a security andthe return on the risk-free asset.

171. Exchange Distribution or Acquisition: A trade involving a largeblock of stock on an unorganized security exchange whereby a brokeragefirms attempts to execute the order by finding enough offsetting orders fromits customers.

172. Exchange Risk (alternatively, Currency Risk): The uncertainty in the

return on a foreign financial asset owing to unpredictability regarding therate at which the foreign currency can be exchanged into the investor's owncurrency.

173. Ex-distribution Date: The date on which ownership of stock isdetermined for purposes of paying stock dividends or issuing shares due tostock splits. Owners purchasing shares before the ex-distribution datereceive the new shares in question. Owners purchasing shares on or after theex-distribution date are not entitled to the new shares.

174. Ex-Dividend Date: The date on which ownership of stock is

determined for purposes of paying cash dividends. Owners purchasing sharesbefore the ex-distribution date receive the new shares in question. Ownerspurchasing shares on or after the ex-dividend date are not entitled to thedividend.

175. Exercise Price (alternatively, Striking Price): In the case of a calloption, the price at which an option buyer may purchase the underlying assetfrom the option writer. In the case of a put option, the price at which anoption buyer may sell the underlying asset to the option writer.



176. Exogenous Variable: In the context of an econometric model, aneconomic variable taken as given and used in the model to explain themodel's endogenous variable.

177. Expectations Hypothesis: A hypothesis that the current futures priceof an asset equal the expected spot price of the asset on the delivery date of the futures contracts.

178. Expected Rate of Inflation: That portion of inflation experienced overa given period of time that was anticipated by investors.

179. Expected Return: The return on a security (or portfolio) that aninvestor anticipates receiving over a holding period.

180. Expected Return Vector: A column of numbers that correspond to theexpected returns for a set of securities.

181. Expected Yield-to-Maturity: The yield-to-maturity on a bondcalculated as a weighted average of all possible yields that the bond mightproduce under different scenarios of default or late payments, where theweights are the probabilities of each scenario occurring.

182. Expiration Date: The date on which the right to buy or sell a securityunder an option contract ceases.

183. Ex Post : After the fact; historical.

184. Ex Post Alpha: A portfolio's alpha calculated on an ex post basis.

Mathematically, over an evaluation interval, it is the difference between theaverage return on the portfolio and the average return on a benchmarkportfolio.

185. Ex Post Selection Bias: In the context of constructing a securityvaluation model, the use of securities that have performed well and theavoidance of securities that have performed poorly, thus making the modelappear more effective than it truly is.

186. Ex Rights Date: The date on which ownership of stock is determinedfor purposes of granting rights to purchase new stock in the right offering.

Owners purchasing shares before the ex-rights date receive the rights inquestion. Owners purchasing shares on or after the ex-rights date are notentitled to the rights.

187. Externally Efficient Market: A market for securities in whichinformation is quickly and widely disseminated, thereby allowing eachsecurity's price to adjust rapidly in an unbiased manner to new informationso that the price reflects investment value.



F

188. Factor (alternatively, Index): An aspect of the investmentenvironment that influences the returns of financial assets. To the extent thata factor influences a significant number of financial assets , it is termedcommon or pervasive.

189. Factor Beta: A relative measure of the mutual variation of a particularcommon factor with the return on the market portfolio. Mathematically, afactor beta is the covariance of the factor with the market portfolio, dividedby the variance of the market portfolio.

190. Factor Loading (alternatively, Attribute or Sensitivity): A measureof the responsiveness of a security's returns to a particular common factor.

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