Glossary

10-K

The annual report on Form 10-K provides a comprehensive overview of the company's business and financial condition and includes audited financial statements. Although similarly named, the annual report on Form 10-K is distinct from the “annual report to shareholders,” which a company must send to its shareholders when it holds an annual meeting to elect directors.

You'll find a company's Form 10-K filings in the SEC's EDGAR database.

accrued interest

Accrued interest is the amount of interest that is earned but has not been paid yet. Interest is generally accrued on a daily basis. When you buy a bond between interest payment dates, you have to pay the accrued interest to the seller.

ADR

A foreign company can have its share publicly traded in the US by listing on stock exchange or by issuing ADR. Technically, the foreign company deposits its shares to a US financial institution, and the institution issues a receipt backing with the shares of the foreign company. The receipt is ADR and is tradable on stock exchange. The ADR is traded like a stock, so you can buy on margin, sell short and may have option. But each ADR may represent more than 1 share of stock. For example, China Mobil (CHL) has a ratio of 1:5. So, each ADR actually has 5 shares behind it.

alpha

What you make an investment, you expect certain amount of return, and this expected return should reflect the risk in the investment. This expected return calculation is based on CAPM.

When your actual return is more than expected, the excess return is called alpha. Thus, the higher the alpha, the better is your performance. Investors use the alpha, as one of the methods, to assess the performance of different mutual funds and portfolio managers

AMEX

The American Stock Exchange. See ASE.

ask price

The lowest price at which a market maker (seller) is willing to sell a stock for, which also is the price a buyer (you) to buy at. So, this is the price you would pay for if you place a market order to buy. You could pay for more than the posted ask price if you were buying the number of shares more than the posted ask size. See ask size for more detail.

ask size

Ask size is the number of shares that sellers are willing to sell at the ask price. Put in another way, the ask size is the number of shares that are available for the investor to buy. If you want to buy more shares than the posted ask size, you may have to pay more for the additional shares (the next set of shares may have a different ask price if you have placed a market order). For example, the ask price is $10.00 and ask size is 300, so there are 300 shares for sale at $10.00 per share. If you buy 400 shares, of course the first 300 shares you would pay for $10.00 each. But the additional 100 shares may be offered at a different price (again assuming you have placed a market order).

asset allocation

This refers to a process of how an investor divides money among different investment categories, such as stocks, commodities, real estate, cash, etc.

Asset allocation is the most important consideration in formulating your investment, since it dictates the return of your portfolio in the long run. Academic studies have shown that a significant portion of the returns depends on how you allocate your investment.

back-end load

The fees that open-end fund charges you when you redeem your shares. See redemption.

basis

It is a tax term that represents the "cost" of an investment in order to calculate the gain or loss when it is sold . Generally, the basis is the the original cost plus additional expenses that are used to buy the investment, such as commission. For example, you buy the stock for a total of $2,000 and you pay $20 commission to buy the stock. So, your basis in the stock is $2,070. This figure will be used to calculate capital gain and loss when the investment is sold.

bear market

A bear market is a period where the market suffers a prolonged period of falling prices. A bear market in stocks is usually caused by economic slowdown or investor pessimism, and a bear market in bonds can be caused by rising interest rates.

beta

Beta is a measure of risk (volatility) in a stock or a portfolio relative to the overall stock market. In general, S&P 500 is used as a proxy of the stock market.

Beta is a ratio computed by comparing the variance in the price of the stock to the S&P 500. Thus, by definition, the stock market has a beta of 1.

If a stock has a beta of 1, it should perform like the overall stock market. Thus, if the market goes up 10%, then the stock should goes up 10% as well.

If the beta is higher than 1, it indicates that the stock is riskier (more volatile) than the market in general (it will rise and fall more than the overall market); if it is less than 1, you can expect the price to change less than the average market.

In a diversified portfolio, all the unsystematic risk is eliminated. The only relevant risk left is beta, so beta risk (market risk) is the main risk measurement. In a non-diversified portfolio, total risk is more appropriate.

bid price

The highest price at which a market maker (buyer) is willing to pay for a stock, which also is the price a seller (you) to sell for. So, this is the price you would sell for if you place a market order to sell. If you are selling more shares than posted bid size, then the excess shares may be selling at a lower price. See bid size for more info.

bid size

Bid size is the number of shares that buyers are willing to purchase at the bid (buy) price. If you are selling more shares than the posted bid size (and have placed a market order), you may end up selling the additional at a lower price if the new bid price has dropped. For example, the bid price is $10.00 and bid size is 300, so there are 300 shares that buyers are willing to purchase at $10.00 per share. If you sell 400 shares, the first 300 shares will sell for $10.00 each. But the additional 100 shares may be sold for a different bid price and you may get less than $10.00 (again assuming that you have placed a market order).

bid-ask spread

The difference between a dealer's bid and asked price. The spread is the profit for the dealer who is making the market for the stock.

bond

Bond is a debt instrument; basically is an IOU. A bond issued by a corporation is called a corporate bond. A bond issued by the federal government is called a treasury bond. A bond usually has a long-term maturity date. Interest is paid based on coupon rate and is paid semi-annually. When you buy a bond between interest payment dates, you have to pay the accrued interest to the seller.

bull market

A bull market is when there is a steady increase in the prices of stocks, bonds and/or commodities over at least several months. Generally the bull market results from economic growth and investors optimism. A bull market usually refers to the entire market. But a popular saying is that "there's always a bull market somewhere", meaning that even if the market as a whole is not moving upward there still will be opportunities in some sectors or areas (like hi-tech or telecom) that are in bull markets.

bulletin board

The complete name for bulletin board is Over-the-counter bulletin board (OTCBB). It is just a quotation service providing real-time price quote. It is not a part of NASDAQ. It is simply a system for brokers an dealers to post price quote (bid and ask). Generally the companies listed on bulletin board are small companies. The bulletin board is regulated by SEC, so the companies listed on bulletin board have to file audited financial statements and to comply with federal securities law. This is one level higher (better) than pink sheets, which are not regulated at all.

call

The right to buy (call) a security at a set (exercise) price before expiration. Each option contract is for 100 shares of a stock. Options' expiration usually ranges from 1 month to 1 year. For that previlege, the option buyer needs to pay the seller a premium. The seller (writer) pockets the premium regardless whether the buyer will exercise the option.

capital gain

Capital gain refers to the profit that you get from the sale of financial securities, such as stocks and bonds. So, the capital gain means the gain from price increase.

capital loss

Capital loss means the loss resulting from the sale of financial securities, like stocks and bonds. You incur a capital loss when your stocks have a price decline.

CAPM

When you make an investment, you are taking risk. CAPM is used to find out the required compensation for investing in a risky investment. Since it is the required return for you to invest, so it is also your expected return.
br/> The CAPM equation: Expected Return = Risk-free rate + Beta (risk premium)
br/> The main concept is that the required return reflects the riskiness of the investment. If the actual return is less than required return, then you are not fairly compensated for taking the risk. But the reflected risk is the market risk or systematic risk. It does not involved the unsystematic risk, which the investment may actually have. Thus, the expected return calculated from the CAPM model may not fully reflect the riskiness of the investment.

certificate of deposit (CD)

Certificate of deposit (CD) is issued by the banks and is paid a fixed interest rate. An investor can buy different maturities of CDs ranging from one month to a few fews. No interest is paid before the CD is mature. At maturity, the interest amount and the original investment will be returned to investors.

closed-end fund

Closed-end fund is a type of mutual fund that has a limited number of shares outstanding. You buy or sell the shares on a stock exchange, just like any other stocks. Therefore, the market price can be higher (premium) or lower (discount) than the net asset value of the fund.

corporate bond

A corporate bond is a bond issued by a listed company. The bond usually has a par value of $1,000. The interest amount is based on the coupon rate and is paid semi-annually. At maturity, investors get their principal (par value) back.

correlation

A statistical concept measuring how two individual securities tend to move together. When they move together in a lock step manner, the correlation is positively perfect and the correlation coefficient is +1. If they tend to move in exactly opposite direction, the correlation is negatively perfect; the correlation coefficient is -1.

correlation coefficient

Correlation coefficient is a statistics measuring how two individual securities move together.

When the correlation coefficient is +1, it indicates that the prices of the two securities will move up and down together in lock step fashion - known as perfectly positively correlated.

A correlation coefficient of -1 means that when the price of one security moves down, the price of the other will moves up in exactly the opposite direction - known as perfectly negatively correlated.

A correlation coefficient of zero means that the movement of the two securities has no association - shows no pattern.

coupon rate

Coupon rate is the interest rate that the bond issuer promises to pay the bond holder. It is a fixed rate for the life of the bond. The interest payment = coupon rate x par value (generally $1,000)

discount

Discount is the market price less than the asset value. For bond, discount means the market value of the bond less than the par value ($1,000). For example, a bond trading at $950 is called a discount bond. For closed-end fund, discount means the market price less than the underlying securities value (net asset value).

diversification

The practice of reducing any one source risk in a portfolio by spreading out assets across different types of investments (i.e. stocks, bonds, commodities, etc.). The purpose is to reduce unique or specific risk and to reduce excess exposure to any one risk.

Generally, diversification refer to investing different asset classes, like stocks, bonds, real estate and commodities. Thus, not all investments are expose to same economic factors.

Diversification can also reduce unique risks within one asset class. For stocks, diversification can mean owning stocks in different sectors (energy,consumer goods, manufacturing, biotechnology, etc) which helps reducing unique risk related o a particular sector.

Global diversification means diversify among different countries. Investors should invest in developed and emerging markets to reduce specifc country and currency risks.

dividend yield

Dividend yield is the dividend rate of return based on the current market price. Dividend yield = dividend per share / market price per share For example, McDonald (MCD) pays cash dividend of $1.50 per share. If the stock market price is $59.95 per share, then the dividend yield is 2.60%. Note that dividend yield changes constantly since the stock price used is the current price. So, although the cash dividend is fixed, the dividend yield to you may be different from mine because we may pay for the stock at different price.

efficient frontier

Based on modern portfolio theory, the optimal portfolios are the portfolios on the efficient frontier, which gives you the best risk/return tradeoff. In other words, the portfolios offer you the highest return given a level of risk (volatility), or the lowest risk given an expected return. No other portfolio can be better than the portfolios on the efficient frontier; therefore, such portfolios are called efficient portfolios.

efficient market

Efficient market means the market prices fully reflect all available relevant information about the securities. Thus, the market prices always reflect the value of the securities.

The efficient market concept is an academic investment theory that no investors can make excess profit (alpha return) by analyzing publicly available information. The theory is not saying you cannot make excess profit sometimes. But no investors can consistently earning excess profit beating the market. So, some investors can be lucky for a few years, but not forever. Efficient market implies that the best investment strategy is to buy index funds or index ETFs since investors can only make market return by taking market risk.

efficient portfolios

Efficient porfolios are the optimal portfolios that you should be investing in. The portfolios offer you the best risk-adjusted return, based on Sharpe ratio. The efficent portfolios give you the highest return at a given risk level, or the lowest risk at a required return.

ETF

Generally, ETF is a unit trust which tracks the performance of a specific market index or a specific sector. Thus, ETFs are usually index funds. For example, SPY tracks S&P 500 , and XLF tracks financial sector. You can buy foreign country index, like FXI tracks China stock market, or FXE for Euro currency. Basically, if you want to invest in a specific market index, a specific country index, and even a specifc industry or sector, you will find a ETF for it.

exercise price

Exercise price is the set (fixed) price at which an option buyer may buy (with a call) or sell (with a put) the underlying securities, such as stock. Also called the strike price. The exercise price is the price the buyer pay to exercise the option. This is in addition to the option premium already paid. Thus, the total price of the stock bought is the premium plus the exercise price.

expiration date

Expiration date is the end of the option period. It is generally the 3rd Friday of the expiration month.

large-cap

Cap means market capitalization. Large-cap stock means the company has a market capitalization of above $5 billion. Note that there is no universal definition of what market value is considered large or small. Larger than $5 billion is generally accepted as large-cap, but some use $10 billion as a cutoff for large-cap.

limit order

A limit order is an order to buy or sell a security at a specific price. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. This is the way you can specify the price you want to sell or to buy at.

load fund

Load fund means you would pay a commission (or fees) when you buy or redeem your shares.

long

Long means you are buying the stock in anticipating the stock price going up. Therefore, investors would long the stocks or markets when the market is bullish.

lot

Lot is a trading unit in stock. One lot is equal to 100 shares. Also known as round lot. Investors buying or selling 5 lots means that 500 shares are traded. If you want to trade less than 100 shares, it is called "odd lot".

maintenance margin

The minimum amount of equity that an investor must keep in their margin account (to secure the margin loan). If the investor is using margin for their trades and the amount of equity in their account drops below the maintenance margin, it will result in a margin call. The investor must satisfy the margin call by depositing money. If the margin call is not met, the brokerage firm can sell the stocks to satisfy the margin call.

margin account

A margin account is a brokerage account that permits an investor to purchase securities on credit and to borrow on securities already in the account. Buying on credit and borrowing are subject to standards established by the Federal Reserve and by the firm carrying the account. Interest is charged on any borrowed funds for the period of time the loan is outstanding.

margin call

A margin call occurs when the equity in an account falls below the maintenance margin, the investor must either add equity to the account (cash or securities) or the brokerage firm can force the sale of securities in the account (to pay off the margin loan).

market capitalization

Market capitalization tells you the current market value of the company. Market-cap for short. It is calculated based on the current market price x total number of shares outstanding. For example, if a company has 10 million shares outstanding, and the current market price is $5 per share, then the market-cap for the company is $50 million. Since it is less than $1 billion, the company is considered as small-cap. Thus, a company market-cap can change significantly along with the stock price fluctuations.

market makers

Market makers are dealers who regularly post bid and ask price in order to make a two-sided market for a security. The market makers readily available to buy and sell at the posted quote to provide liquidity for the securities. Market makers are similar to the specialists of the NYSE. When you buy or sell a NASQAQ or OTC stocks at the market price, you are probably trading with a market maker.

market order

A market order is an order to buy or sell a stock at the current market price. The market price means the lowest ask price for you to buy at and the highest bid price for you to sell at. Unless you specify otherwise, your broker will enter your order as a market order.

The main advantage of a market order is your buy or sell order will be executed immediately, but the disadvantage is that execution price is unknown. The price you pay or get may not always be the price you obtained from a real-time quote. This may be especially true when stock prices are more volatile.

When you place an order "at the market," particularly for a large number of shares, there is a greater chance you will receive different prices for parts of the order.

market risk

Market risk is the risk (volatility) that must be borne by virture of being in the market. The risk arises from systematic factors that affect all securities. Such risk cannot be avoided by diversification; thus it is called as undiversifiable risk or systematic risk.

micro-cap

Cap means market capitalization. Micro-cap stock means the company has a market capitalization of less than $500 million. Note that there is no universal definition of what market value is considered small or micro stock. But less than $500 million is generally accepted as micro-cap.

mid-cap

Cap means market capitalization. Mid-cap stock means the company has a market capitalization between $1 - $5 billion. Note that there is no universal definition of what market value is considered large, mid or small. But the $1-5 billion is generally accepted as mid-cap.

NASD

NASD stands for National Association of Securities Dealers. It is a self-regulatory body that licenses brokers and dealers who trade NASDAQ securities.

Nasdaq

Nasdaq stands for the National Association of Securities Dealers Automated Quotation System. Unlike the New York Stock Exchange where trades take place on an exchange, Nasdaq is an electronic stock market that uses a computerized system to provide brokers and dealers with price quotes. NASDAQ uses market makers to provide liquidity as opposed to NYSE/ASE uses specialist system. The Nasdaq Stock Market comprises two separate markets: (1) the Nasdaq National Market that trades the largest and most active securities, and (2) The Nasdaq SmallCap Market that lists smaller companies. The Nasdaq Stock Market electronically lists quotes for over-the-counter securities and many New York Stock Exchange listed companies.

NAV

NAV is a short form for net asset value. It is the value (price) of an open-end mutual fund and is published by financial newspaper. When you buy or sell an open-end mutual fund share, NAV is the price you pay for or sell at. NAV = (market value of fund's assets - liabilities)/number of fund shares.

net asset value

It is the value (price) of an open-end mutual fund and is published by financial newspaper. When you buy or sell an open-end mutual fund share, NAV is the price you pay for or sell at. NAV = (market value of fund's assets - liabilities)/number of fund shares.

no-load fund

No-load fund means you don't pay a commission to buy or redeem your shares.

odd lot

Odd lot means trading number of shares that can't be divisible by 100, like 85 or 185.. A lot means 100 shares. Investors use the odd lot trading volume as a indicator whether small investors are bullish.

open-end fund

Open-end fund is a type of mutual fund that has no limit of number of shares issued. You directly buy from or redeem your shares by the mutual fund itself. The price you trade at is the net asset value (NAV) that can be obtained from the mutual fund or financial newspaper. You may pay a commission (load fund) or not pay a commission (no-load fund) when you trade the fund shares.

option

Option is a contract giving the purchaser the right to buy or sell securities, such as stocks, at a set price within a specific period of time. The set price is called an exercise (or strike) price. Each option contract has an expiration date. You can buy or sell an option that lasts for 3, 6 or 9 months. You can also trade option that lasts for more than one year, called LEAPs. Buying and selling options requires the investor to have a margin (credit) account with a brokerage firm.

option premium

Option premium is the price you pay (receive) to buy (sell) the option contract. The premium is generally determined by the value of the underlying security, time remaining, and the volatility.

par value

Par value is the face value or the mature value of a bond, which generally is $1,000. The par value is used to compute the interest payment.

pink sheets

It is just a way for dealers to post price quote - bid/ask. Generally the smallest companies that don't have much trading activities are traded on pink sheets. Pink sheets stocks are NOT regulated at all. So, the companies are not required to file any financial information with SEC. Penny stocks are mostly traded on pink sheets. This is the reason the penny stocks are very risky since we don't know much about these companies.

preferred stock

A type of stock that pays dividends at a specified rate and that has preference over common stock in the payment of dividends and the liquidation of assets. Preferred stock does not generally carry voting rights.

premium

Premium is the market price more than the asset value. For bond, premium means the market price of the bond more than the par value ($1,000). For example, a bond trading at $1,050 is called premium bond. For closed-end fund, premium means the market price more than the value of the underlying securities (net asset value). It is also the price of an option - see option premium.

pump and dump

"Pump and dump" schemes, also known as "hype and dump manipulation," involve the touting of a company's stock (typically microcap companies) through false and misleading statements to the marketplace. After pumping the stock, fraudsters make huge profits by selling their cheap stock into the market. Pump and dump schemes often occur on the Internet where it is common to see messages posted that urge readers to buy a stock quickly or to sell before the price goes down, or a telemarketer will call using the same sort of pitch. Often the promoters will claim to have "inside" information about an impending development or to use an "infallible" combination of economic and stock market data to pick stocks. In reality, they may be company insiders or paid promoters who stand to gain by selling their shares after the stock price is "pumped" up by the buying frenzy they create. Once these fraudsters "dump" their shares and stop hyping the stock, the price typically falls, and investors lose their money.

put

The right to sell (put) a security at a set (exercise) price before expiration. Each option contract is for 100 shares of stock. Option generally expires from 1 month to 1 year. For that previlege, the option buyer needs to pay the seller a premium. The seller (writer) pockets the premium regardless whether the buyer will exercise the option.

quote

quote are prices posted by dealers to buy or sell. Generally, the quote is expressed as bid/ask. So, the bid is the price the dealer is willing to buy and ask is the price the dealer is willing to sell at.

Redemption fee

Redemption fee is the fee you pay when you redeem your open-end mutual fund shares. Some funds may not charge you a commission when you buy, but will charge you a fee when you redeem fund shares. The amount of redemption fee you would pay depends on the class -share and the number of years you own the shares.

risk premium

Risk premium is the expected return above the risk-free rate. The excess return (premium) compensates for the risk in the investment.

risk-free rate

Risk-free rate is the rate of return that you can earn without taking any risk (with certainty). The risk-free return is generally refer to the interest paid by US government, like T-bills or T-bonds.

savings bonds

Savings bonds are debt securities issued by the U.S. Department of Treasury to pay for the U.S. government’s borrowing needs. Saving bonds are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government. U.S. savings bonds have tax advantages as opposed to US treasuries such as T-bills. You can defer federal taxes on the interest until you cash in the bond or until at maturity. You still have to pay federal taxes on the interest. However, savings bond interests are exempt from state and local taxes.

SEC

The U.S. Congress created the U.S. Securities and Exchange Commission in 1934 following the stock market crash of 1929. The purpose of SEC is to protect investors from fraud and unfair sales practices. The SEC protects investors by enforcing our nation's securities laws, taking action against wrongdoers, and overseeing our securities markets and firms to ensure that investors are treated fairly and honestly.

sell short

To "sell short" means shorting or selling a stock that you do not own in hopes the price of the stock will decline. See "short" for more information.

Sharpe measure

Sharpe measure is a ratio of excess return to beta or [excess return / standard deviation]. So, the ratio gives you the average excess return per unit of total risk (both systematic and unsystematic risk)

short

Short means you are selling the stock that you don't own. You borrow the stocks from your broker to sell. You would profit from the stock price going down becasue you could buy back the stocks at a lower price. Therefore, investors would short stocks or market indices when the market is bearish. Selling short requires a margin market. If the stock goes up instead, you are required to increase your margin or the broker would force you to liquid your short position.

small-cap

Cap means market capitalization. Small cap stock means the company has a market capitalization of less than $1 billion. Note that there is no universal definition of what market value is considered large-, mid- or small-cap. But less than $1 billion is generally accepted as small-cap.

specialists

Specialists are the brokers/dealers who provide liquidity of the assigned stocks listed in NYSE and ASE. Their main function is to "maintain a fair and an orderly market". The specialist system is unique for the NYSE and ASE (as opposed to NASDAQ market uses market makers). Each listed stock has a specialist, but a specialist may be responsible for several stocks depending on the trading volume.

stop-limit order

A stop-limit order is an order to buy or sell a stock that combines the features of a stop order and a limit order. Once the stop price is reached, the stop-limit order becomes a limit order to buy or to sell at a specified price. The benefit of a stop-limit order is that the investor can control the price at which the trade will get executed. But, as with all limit orders, a stop-limit order may never get filled if the stock's price never reaches the specified limit price. This may happen especially in fast-moving markets where prices fluctuate wildly.

stop-loss order

A stop-loss order is an order to sell a stock once the price of the stock reaches a specified price, known as the stop price. When the specified price is reached, your stop order becomes a market order. A stop-loss order helps investors to avoid further losses or to protect a profit that exists if a stock price starts to drop. A stop-loss order to sell is always placed below the current market price so you can protect your profits. Or you can put a stop-loss order below the purchase price when you initially buy the stock. This could limit your loss amount - a good tool to pre-set your loss limit. The advantage of a stop-order is you don't have to monitor how a stock is performing on a daily basis. The disadvantage is that the stop price could be activated by a short-term fluctuation in a stock's price. Also, once your stop price is reached, your stop order becomes a market order and the price you receive may be much different from the stop price, especially in a fast-moving market where stock prices can change rapidly. An investor can avoid the risk of a stop order not guaranteeing a specific price by placing a stop-limit order.

stop-order

A stop-order is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. When the specified price is reached, your stop order becomes a market order. Sell Stop-Order — A sell stop order helps investors to avoid further losses or to protect a profit that exists if a stock price starts to drop. A stop-order to sell is always placed below the current market price. Buy Stop-Order — Investors typically use a stop order when buying stock to limit a loss or protect a profit on short sales. The order is entered at a stop price that is always above the current market price. The advantage of a stop-order is you don't have to monitor how a stock is performing on a daily basis. The disadvantage is that the stop price could be activated by a short-term fluctuation in a stock's price. Also, once your stop price is reached, your stop order becomes a market order and the price you receive may be much different from the stop price, especially in a fast-moving market where stock prices can change rapidly. An investor can avoid the risk of a stop order not guaranteeing a specific price by placing a stop-limit order.

systematic risk

Systematic risk is the volatility of the stock that is related to the overall stock market risk. Market risk means the risk that affects all securities, for example, changes of interest rates. When you make an investment (stocks, bonds or real estates), you are taking a risk, which is called total risk. Total risk has 2 components: systematic and unsystematic risk. Thus, total risk = systematic risk + unsystematic risk. The systematic risk is the overall market risk that affects all investment in the same asset class, like higher interest rate will lower all stocks's value. Although you can reduce or eliminate the unsystematic risk by proper diversification, systematic risk is the risk that you cannot avoid. In other words, you can't reduce systematic risk by diversification. However, you can hedge the risk using options.

T-bills

T-bills are short-term govenment debts that have maturity dates less than 12 months. The interest is tax exempt from state and local governments, but the federal government still taxes the interests it pays the holders.

T-bonds

T-bonds are long-term govenment debts that have maturity dates more than 10 years. The interests are tax exempt from state and local governments, but the federal government still taxes the interests it pays the holders.

T-notes

T-notes are medium-term govenment securities that have maturity dates between 1 to 10 years. Generally, the 10-years T-note is considered the standard risk-free rate for financial calculation, such as CAPM model.

The interest is tax exempt from state and local governments, but the federal government still taxes the interests it pays the holders.

TIPS

TIPS are US government securities that the par value is adjusted for inflation periodically. Thereforem, the par value is always protected by the inflation adjustment, and the interest rate is the real interest rate that you earn. The inflation is measured by consumer price index (CPI).

total return

Total return gives you the overall rate of return of an investment. When you make an investment, you may have 2 types of return: current and capital. Current means the return earned during the year and capital means the price changes. For bonds, the total return include the interest payments and price changes. For stocks, it will be the dividend and price changes. Remember, price changes can be price increase or decrease. Therefore, the proper measure of an investment is the total return.

total risk

Total risk is the overall returns variation of an investment. It is measured by standard deviation. The total risk (variation) has 2 components: systematic and unsystematic risk. It is not a proper risk measure if the investment is in a diversified portfolio. Instead, it should be measure by beta.

Treynor measure

Treynor measure is a ratio of excess return to beta or [excess return / beta]. So, the ratio gives you the average excess return per unit of systematic (market) risk.

unsystematic risk

Unsystematic risk is the risk specific or unique to a company or an industry. This risk can be reduced or eliminated by proper diversification. When you make an investment (stocks, bonds or real estates), you are taking a risk, which is called total risk. Total risk has 2 components: Systematic and unsystematic risk. Thus, total risk = systematic risk + unsystematic risk. The systematic risk is the overall market risk that affects all investment in the same asset class, like higher interest rates will lower all stocks's value. Unsystematic risk is called unique or specific risk because it is the risk that affects only a specific stock or a specific industry. For example, if Congress decides to reduce defense budget, then the defense industry is affected but not other industries, like utilities. You can reduce or eliminate the unsystematic risk by proper diversification. Proper diversification means investing across different sectors and industries that are not affected by the same common factors.

US treasuries

US treasuries are debts securities issued by the US government. They have T-bills, T-bonds and T-notes.

T-bills are short-term securities with maturity dates less than 12 months.
T-notes are medium-term securities with maturity dates betwen 1-10 years.
T-bonds are long-term securities with maturity dates longer than 10 years.

The interests of US govenment securities are tax exempt from state and local governments.

value fund

value fund

volatility

Volatility is the unpredicatable price changes of a security. Volatility measures the standard deviation of the continuously compounded returns on a security. Volatility equal to risk. It is used to calculate the option premium. The higher the volatility, the higher the risk, and thus the higher the option premium.

yield-to-maturity

Yield-to-maturity (YTM) is a measure of average rate of return that will be earned when hold the bond to maturity. Generally, when you buy a bond, you will either pay morer (premium) or less (discount) than the par value. Therefore, your total return will be more or less than the coupon rate. The YTM gives you the average rate of return if you hold the bond until maturity.

YTM

YTM stands for yield to maturity.

zero coupon bonds

Zero coupon bonds are bonds that do not pay interest during the life of the bonds. Instead, investors will receive both the accrued interest and principal at maturity. Because no interest is paid befoer maturity, the bond is sold at a deep discount. The maturity dates on zero coupon bonds are usually long-term — mature in ten, fifteen, or more years. These long-term maturity dates allow an investor to plan for a long-range goal, such as paying for a child’s college education. With the deep discount, an investor can put up a small amount of money that can grow over many years.