Term Definitions

AlphaA measure of performance based on the excess return of an investment relative to the return of a benchmark index.
Active Share Percentage of how much a portfolio differs from its benchmark index, with 0% indicating no difference and 100% indicating no common holdings.
Agency Mortgage-Backed Security (MBS)Debt security composed of a pool of residential loans issued by the Government National Mortgage Association (Ginnie Mae), the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac). 
Asset CoverageAbility to cover debt obligations with assets. 
Basis Point1/100th of 1%.
BetaMeasure of a security or portfolio's volatility compared to the broad market's volatility.  
Book to MarketCommon shareholders' equity divided by market capitalization. 
Book ValueAssets minus liabilities. Also known as shareholders’ equity.
Bullet SecurityA debt investment for which the principal is repaid in a balloon payment at maturity.
Callable BondA debt security that can be repaid by the issuer prior to maturity. 
Capital Adequacy RatioCapital divided by risk-weighted assets.
Capital Expenditure (Capex)Money spent to purchase or upgrade physical assets such as property, plant, and equipment.  
Cash FlowAmount of cash generated minus the amount of cash used by a company in a given period. 
Cash Pay BondDebt security which makes interest payments in cash.  
Commercial Mortgage-Backed Security (CMBS)Debt security composed of a pool of commercial property loans.
Consumer Price IndexMeasurement by the U.S. Bureau of Labor Statistics of price changes over time for a representative basket of goods and services.
CorrelationStatistical measure of how two securities move in relation to each other. 
Coupon RateAnnual interest rate on a debt security as a percentage of face value. 
Credit RiskLikelihood of loss due to a borrower defaulting on a loan.
Credit SpreadDifference between yields from bonds of similar maturity but different credit quality.
Discount RateAmount of interest charged by the Federal Reserve for short-term loans to commercial banks and other financial institutions. 
Dividend Payout RatioAmount of dividends paid to shareholders relative to net income.
DrawdownPercentage change in the value of a security or portfolio from a peak to a subsequent trough. 
Dry PowderTreasuries or other debt securities that can be liquidated on short notice. 
Dividend YieldDividends per share divided by price per share.    
Dot PlotData points plotted on a graph to show trends such as projected interest rates.
DurationWeighted maturity of a fixed-income investment’s cash flows, used in the estimation of the price sensitivity of fixed-income securities for a given change in interest rates.
EBITDAEarnings before interest, taxes, depreciation and amortization. 
Enterprise ValueMarket capitalization plus debt, minority interest, and preferred shares, minus total cash and cash equivalents. 
Enterprise Value/EBITMarket capitalization plus debt, minority interest, and preferred shares, minus total cash and cash equivalents, divided by earnings before interest and taxes.
Enterprise Value/EBITDAMarket capitalization plus debt, minority interest, and preferred shares, minus total cash and cash equivalents, divided by earnings before interest, taxes, depreciation, and amortization. 
Enterprise Value/Free Cash FlowMarket capitalization plus debt, minority interest, and preferred shares, minus total cash and cash equivalents divided by total cash flow from operations less capital expenditures.
Enterprise Value/Sales Market capitalization plus debt, minority interest, and preferred shares, minus total cash and cash equivalents, divided by annual sales. 
Federal Funds RateAmount of interest depository institutions charge to lend reserve funds overnight to other depository institutions.
Floating Rate NoteDebt instrument that pays a variable rate of interest. 
Forward EarningsConsensus earnings estimates for a future period, usually the next 12 months or next fiscal year.
Forward Price/EarningsPrice per share divided by earnings per share expected over the next 12 months or next fiscal year.
Free Cash FlowTotal cash flow from operations less capital expenditures.
Gap DownSignificant decrease in price of a financial instrument between market close and opening, or when there is little to no trading.  
Graham-and-Dodd Investment ApproachMethod described by Benjamin Graham and David Dodd in their 1934 book Security Analysis which seeks to identify securities that may be underpriced relative to their estimated intrinsic value. 
Idiosyncratic RiskPossibility of loss prevalent in a particular asset class.
IndentureLegal contract between a bond issuer and bondholder.
Interest CoverageEarnings before interest and taxes during a given period divided by interest expense due in that period.
Investment GradeCredit rating that indicates a debt instrument has a relatively low risk of default. 
LIBORLondon Interbank Offered Rate. A survey of what London banks expect to pay to borrow overnight from other London banks. 
Margin Call Request from a broker to increase a margin account's balance when it falls below a required minimum. 
Margin of SafetyDiscount of a security’s market price to what the firm believes is the intrinsic value of that security. 
Market CapitalizationNumber of common shares outstanding multiplied by market price per share. 
Net Asset ValueTotal assets minus liabilities, divided by the number of outstanding shares. 
Net Present Value Difference between present value of cash inflows and present value of cash outflows over a given period.
Net CashTotal cash minus total debt.
Net Interest IncomeDifference between interest revenue and interest expense. 
Net Interest MarginDifference between interest revenue and interest expense as a percentage of income-generating assets. 
Net-NetWhen a company trades for less than the value of current assets minus all liabilities.
Nifty Fifty Nickname for a group of large U.S. companies in the 1960s and '70s, characterized by high price/earnings and consistent earnings growth. 
Normalized Earnings Earnings adjusted to remove effects of one-time, unusual, or seasonal influences.  
Operating MarginOperating income divided by net sales. 
Option-Adjusted SpreadDifference between the interest rate paid by a fixed-income security and the risk-free rate of return, adjusted to take into account an embedded option. 
Par ValueAmount a bond issuer promises to repay when the bond matures.
Patent Cliff Patent expirations for pharmaceutical companies which typically result in a drop in sales. 
Personal Consumption Expenditures Price IndexMeasurement by the Bureau of Economic Analysis of changes in prices U.S. consumers pay for goods and services. 
Price/BookPrice per share divided by book value per share.
Price/Cash FlowPrice per share divided by cash flow per share.
Price/EarningsPrice per share divided by earnings per share. 
Price/Tangible Book ValuePrice per share divided by tangible book value per share. 
Profit MarginNet income divided by revenue. 
R2 (R-squared) Percentage of a security or portfolio’s results that was likely caused by the movements of a benchmark index. 
Reflation TradePurchase of a security expected to perform well because of or during an economic recovery.  
Return on AssetsNet income divided by total assets.
Return on EquityNet income divided by shareholder equity. 
Return on Invested Capital/Return on CapitalNet income minus dividends paid, divided by total capital.
Secured DebtLoan backed by the borrower's collateral.
Sell SideThe part of the financial industry involved with the creation, promotion, analysis, and sale of securities.
Sharpe RatioPortfolio return minus the risk-free rate—such as that of the 10-year U.S. Treasury bond—divided by standard deviation of the portfolio's excess returns.
Shiller Price/EarningsPrice divided by real (inflation-adjusted) per-share earnings over a 10-year period
Standard Deviation A data set's dispersion from its mean. 
Systematic RiskPossibility of loss inherent to an entire market. Usually considered undiversifiable.
Systemic Risk Possibility of loss from a company-level event that could destabilize an entire industry or economy.
Tangible Book ValueBook value minus intangible assets (e.g., goodwill).
Tangible EquityBook value minus intangible assets (e.g., goodwill) and preferred equity.
Term Structure of Interest Rates Graph that depicts yields offered by bonds of similar quality at different maturities.
Total ReturnIncome plus capital appreciation.
Value BondsDebt securities selling at a discount to our estimates of their intrinsic value.
CBOE Volatility Index (VIX)Shows the market’s expectation of 30-day volatility. Constructed using the implied volatilities of S&P 500 Index options.  
Working CapitalCurrent assets minus current liabilities; a measure of a company’s efficiency and short-term financial health. 
Write-DownReduction in the book value of an asset. 
YieldAnnual income from an investment (dividend, interest, etc.) divided by the current market price of the investment.
Yield CurveGraphical comparison of the relationship between interest rates for loans of various maturities with similar credit quality. 
Yield SpreadDifference in yield from a Treasury security and another debt security of similar maturity.
Yield to MaturityTotal return expected from a bond held until its expiration date.