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Industry Terms and Definitions

Active Share

Active Share measures the degree of difference between a fund portfolio and its benchmark index.


Alpha is an annualized return measure of how much better or worse a fund’s performance is relative to an index of funds in the same category, after allowing for differences in risk.

Alt-A, or Alternative A-paper

Alt-A, or Alternative A-paper, is a type of U.S. mortgage that, for various reasons, is considered riskier than A-paper, or “prime”, and less risky than “subprime,” the riskiest category.

Basel II Accords

Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face.

Asset-backed security (ABS)

Asset-backed security (ABS) is a financial security collateralized by a pool of assets such as loans, leases, credit card debt, royalties or receivables.

Basis Point

basis point is a value equaling one one-hundredth of a percent (1/100 of 1%).


Beta measures the sensitivity of rates of return on a fund to general market movements.

Beta measures the volatility of the fund, as compared to that of the overall market. The Market’s beta is set at 1.00; a beta higher than 1.00 is considered to be more volatile than the market, while a beta lower than 1.00 is considered to be less volatile.

Black Scholes model

The Black Scholes model is a model of price variation over time of financial instruments such as stocks that can, among other things, be used to determine the price of a European call option.

Book value

Book value is the net asset value of a company, calculated by subtracting total liabilities from total assets.


Brexit is an abbreviation of “British exit”, which refers to the June 23, 2016 referendum by British voters to exit the European Union.

Business development company (BDC)

Business development company (BDC) is an organization that invests in and helps small- and medium-size companies grow in the initial stages of their development.


CAGR stands for the Compound Annual Growth Rate. It is the measure of an investment’s annual growth rate over time, with the effect of compounding taken into account. It is often used to measure and compare the past performance of investments, or to project their expected future returns.

Cap Rate

Capitalization rate (or “cap rate”) is the ratio between the net operating income produced by an asset and its capital cost (the original price paid to buy the asset) or alternatively its current market value.

Cash flow

Cash flow measures the cash generating capability of a company by adding non-cash charges (e.g., depreciation) and interest expense to pretax income.

Cash-on-Cash Return

Cash-on-cash return is a method of yield computation used for investments lacking an active secondary market, such as limited partnerships.

Closed-end fund (CEF)

Closed-end fund (CEF) is a publically traded, pooled investment fund with a manager overseeing the portfolio. It is then structured, listed, and traded like a stock on a stock exchange.

Collateralized Loan Obligation (CLO)

Collateralized Loan Obligation (CLO) is a security backed by a pool of debt, often low-rated corporate loans. Collateralized loan obligations (CLOs) are similar to collateralized mortgage obligations, except for the different type of underlying loan.

Collateralized put-write

Collateralized put-write is nn options trading strategy that involves short positions in put options and the use of the underlying stock as collateral.

Constant Currencies

Constant Currencies is an exchange rate that eliminates the effects of exchange rate fluctuations and that is used when calculating financial performance numbers. Companies with major foreign operations often use constant currencies when calculating their yearly performance measures.


Contango is a condition in which distant delivery prices for futures exceed spot (for immediate delivery) prices, often due to the costs of storing and insuring the underlying commodity.

Convertible security

Convertible security is an investment that can be changed into another form. The most common convertible securities are convertible bonds or convertible preferred stock, which can be changed into equity or common stock.


Correlation is a statistical measure of how two securities move in relation to each other.

Cost Basis

Cost Basis is the original value of an asset for tax purposes (usually the purchase price), adjusted for stock splits, dividends and return of capital distributions.

Dark Pools

Dark Pools are private exchanges or forums for trading securities; unlike stock exchanges, dark pools are not accessible by the investing public.

Debt to Capital Ratio

Debt to capital ratio (D/C ratio) shows the proportion of a company’s debt to its total capital, which consists of the sum of its debt and equity combined.

Debt to Equity Ratio

Debt to Equity Ratio is a measure of a company’s financial leverage calculated by dividing its total liabilities by stockholders’ equity. It indicates what proportion of equity and debt the company is using to finance its assets.

Discounted Cash Flow

Discounted cash flow is calculated by multiplying future cash flows by discount factors to obtain present values.

Dividend yield

Dividend yield is the return on an investor’s capital investment that a company pays out to its shareholders in the form of dividends. It is calculated by taking the amount of dividends paid per share over the course of a year and dividing by the stock’s price.

Dollar-cost averaging

Dollar-cost averaging (DCA) is an investment technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. The investor purchases more shares when prices are low and fewer shares when prices are high.


Drawdown is the peak-to-trough decline during a specific record period of an investment, fund or commodity.

Dry Powder

Dry Powder is a slang term referring to marketable securities that are highly liquid and considered cash-like. It can also refer to cash reserves kept on hand.


Duration is a commonly used measure of the potential volatility of the price of a debt security, or the aggregate market value of a portfolio of debt securities, prior to maturity. Securities with a longer duration generally have more volatile prices than securities of comparable quality with a shorter duration.

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)

Earnings before interest, taxes, depreciation and amortization is an approximate measure of a company’s operating cash flow based on data from the company’s income statement. Calculated by looking at earnings before the deduction of interest expenses, taxes, depreciation, and amortization.

Earnings Growth

Earnings growth is a measure of growth in a company’s net income over a specific period, often one year. The term can apply to actual data from previous periods or estimated data for future periods.

Earnings per share (EPS)

Earnings per share (EPS) is calculated by taking the total earnings divided by the number of shares outstanding.

Economic Value Added (EVA)

Economic Value Added (EVA) is an estimate of a firm’s economic profit – being the value created in excess of the required return of the company’s investors (being shareholders and debt holders). Quite simply, EVA is the profit earned by the firm less the cost of financing the firm’s capital.


Emerging Markets equities refers to countries or regions undergoing fast economic growth. A formula using a country’s gross domestic product (GDP) and per capita income is often used to determine if a country is an emerging market. These include countries in the Americas, Europe, Africa, Asia and the Middle East.

Enterprise Value/Owners’ Earnings (or Free Cash Flow)

Enterprise Value/Owners’ Earnings (or Free Cash Flow) compares the total valuation of the company with its ability to generate cash flow. It is the inverse of the Free Cash Flow Yield. The lower the ratio of enterprise value to the free cash flow figures, the faster a company can pay back the cost of its acquisition or generate cash to reinvest in its business.

Enterprise value/sales multiple

Enterprise value/sales multiple is measure of a company’s value, often used as an alternative to straightforward market capitalization. EV is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents.


EV/EBITDA is a financial ratio that measures a company’s return on investment and is commonly used to compare companies within an industry.

Ex-ante beta

Ex-ante beta is expected or predicted volatility of a security or portfolio.

Federal Home Loan Mortgage Corporation (“Freddie Mac”)

Federal Home Loan Mortgage Corporation (“Freddie Mac”): A stockholder-owned, government-sponsored enterprise (GSE) chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing for middle income Americans. The FHLMC purchases, guarantees and securitizes mortgages to form mortgage-backed securities. The mortgage-backed securities that it issues tend to be very liquid and carry a credit rating close to that of U.S. Treasuries.

Federal National Mortgage Association (“Fannie Mae”)

Federal National Mortgage Association (“Fannie Mae”): A government-sponsored enterprise (GSE) that was created in 1938 to expand the flow of mortgage money by creating a secondary mortgage market. Fannie Mae is a publicly traded company which operates under a congressional charter that directs Fannie Mae to channel its efforts into increasing the availability and affordability of homeownership for low-, moderate- and middle-income Americans.

Floating interest rate

Floating interest rate, also known as a variable or adjustable rate, refers to any type of debt instrument, such as a loan, bond, mortgage, or credit, that does not have a fixed rate of interest over the life of the instrument.

Free Cash Flow

Free cash flow is the amount of cash a company has after expenses, debt service, capital expenditures and dividends.

Forward Price to Earnings (Forward P/E)

Forward Price to Earnings (Forward P/E) is a measure of the price-to-earnings ratio using forecasted earnings for the P/E calculation.

Free Cash Flow Yield

Free cash flow yield is an overall return evaluation ratio of a stock, which standardizes the free cash flow per share a company is expected to earn against its market price per share. The ratio is calculated by taking the free cash flow per share divided by the share price.

Government National Mortgage Association (“Ginnie Mae”)

Government National Mortgage Association (“Ginnie Mae”): A U.S. government corporation within the U.S. Department of Housing and Urban Development (HUD). Ginnie May aims to ensure liquidity for government-insured mortgages, including those insured by the Federal Housing Administration (FHA), the Veterans Administration (VA) and the Rural Housing Administration (RHA), as well as bring investors’ capital into the market for these types of loans, so that the issuers have the means to issue more. Most of the mortgages securitized as Ginnie Mae mortgage-backed securities (MBSs) are those guaranteed by FHA, which are typically mortgages for first-time home buyers and low-income borrowers.

Gross Domestic Product (GDP)

Gross Domestic Product (GDP) is the market value of the goods and services produced by labor and property in the United States.

Gross Merchandise Volume

Gross merchandise volume or GMV is a term used in online retailing to indicate a total sales dollar value for merchandise sold through a particular marketplace over a certain time frame.

Growth S-Curve

Growth S-Curve refers to businesses that are characterized by a shallow start, where only early adopters and niche markets buy the product or invest in the company. Then they experience a rapid growth, and the product or business has a dominant position in the market. After the rapid growth, these businesses maintain a high performance level but with little growth, which often signals a mature but saturated market.

Internal Rate of Return (IRR)

Internal Rate of Return is the discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero.

Intrinsic Value

Intrinsic Value is the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors.

Inverse floater

Inverse floater (or inverse floating rate note) is a bond or other type of debt whose coupon rate has an inverse relationship to a benchmark rate.

Inverse interest-only security

Inverse interest-only security is a security that pays a coupon inversely related to market rates (i.e., it moves in the opposite direction of interest rates), instead of paying a coupon corresponding to the interest payments homeowners (mortgagors) actually make.

Investment Grade

An Investment Grade bond is a bond with a rating of AAA to BBB; a Below Investment Grade bond is a bond with a rating lower than BBB.


LIBOR is the London Inter-Bank Offer Rate. This is the interest rate that banks charge each other for loans.

Loan participation note (LPN)

Loan participation note (LPN) is a fixed-income security that permits investors to buy portions of an outstanding loan or package of loans.


Investors maintain “long” security positions in the expectation that the stock will rise in value in the future. A “long” position in a security means that you own the security. The opposite of a “long” position is a “short” position.

Loss adjusted yields

Loss adjusted yields represent the yield earned after expected losses on a specific mortgage bond, across a variety of scenarios.

Margin of Safety

Margin of safety is a principle of investing in which an analyst only purchases securities when the market price is below the analyst’s estimation of intrinsic value. It does not guarantee a successful investment.

Market Cap

Market cap is the market price of an entire company, calculated by multiplying the number of shares outstanding by the price per share.

Master limited partnership (MLP)

Master limited partnership (MLP) is a type of business venture that exists in the form of a publicly traded limited partnership. It combines the tax benefits of a partnership — profits are taxed only when investors actually receive distributions — with the liquidity of a public company.

Maximum Drawdown

Maximum Drawdown (MDD) is the maximum loss from a peak to a trough of a portfolio, before a new peak is attained. Maximum Drawdown (MDD) is an indicator of downside risk over a specified time period..

Mezzanine debt

Mezzanine debt is a type of debt that incorporates equity-based options, such as warrants, with a lower-equity debt. It is actually closer to equity than debt, because the debt is only important in the event of bankruptcy. Mezzanine debt is frequently associated with acquisitions and buyouts where it may be used to prioritize new owners ahead of existing owners in the event of bankruptcy.

Moonshot Project

Moonshot project is a project or proposal that addresses a huge problem, proposes a radical solution, or uses breakthrough technology

Morningstar Multi-Alternative Category

The Morningstar Multi-Alternative Category represents the average annual composite performance of all mutual funds listed in the Multi-Alternative Category by Morningstar. Morningstar’s Multi-Alternative Category includes a variety of strategies focused on total return across a broad mandate.

Mortgage-backed security (MBS)

Mortgage-backed security (MBS) is a type of asset-backed security that is secured by a mortgage or collection of mortgages

Mortgage real estate investment trusts (mREITs)

Mortgage real estate investment trusts (mREITs) deal in investment and ownership of property mortgages; they loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities.


Net Debt/EBITDA is a measure of a company’s ability to pay off its incurred debt. This ratio gives the investor the approximate amount of time that would be needed to pay off all debt, ignoring the factors of interest, taxes, depreciation and amortization.

Net operating profit after tax (NOPAT)

Net operating profit after tax (NOPAT) is a company’s potential cash earnings if its capitalization were unleveraged (that is, if it had no debt).

Net profit

Net profit represents the number of sales dollars remaining after all operating expenses, interest, taxes and preferred stock dividends (but not common stock dividends) have been deducted from a company’s total revenue.

Nifty Fifty

Nifty Fifty refers to the 50 stocks that were most favored by institutional investors the 1960s and 1970s. Companies in this group were usually characterized by consistent earnings growth and high P/E ratios.

Non-GAAP Earnings

Non-GAAP Earnings is an alternative earnings measure of the performance of a company. Many companies report non-GAAP earnings in addition to the required generally accepted accounting principles (GAAP) earnings, stating that the alternate figure more accurately reflects their company’s performance.

Non-index-eligible securities

Non-index-eligible securities are securities that are not eligible for inclusion in an index

Nonperforming Loan

Nonperforming Loan is a sum of borrowed money upon which the debtor has not made his or her scheduled payments for at least 90 days.


Options are a financial derivative sold by an option writer to an option buyer. The contract offers the buyer the right, but not the obligation, to buy (call option) or sell (put option) the underlying asset at an agreed-upon price during a certain period of time or on a specific date.

Out of the money (OTM)

Out of the money (OTM) is term used to describe a call option with a strike price that is higher than the market price of the underlying asset, or a put option with a strike price that is lower than the market price of the underlying asset. An out of the money option has no intrinsic value, but only possesses extrinsic or time value.

Pair-wise correlation

Pair-wise correlation is the average of the correlations of each managers’ performance with each of the other managers on the fund.

Price to Book (P/B) Ratio

  1. The Price to book (P/B) ratio compares a stock’s market value to the value of total assets less total liabilities.
  2. The Price to book (P/B) ratio is calculated by dividing the current price of the stock by the company’s book value per share.

Price to Cash Flow Ratio

The price/cash flow ratio is a ratio used to compare a company’s market value to its cash flow. It is calculated by dividing the company’s market cap by the company’s operating cash flow in the most recent fiscal year (or the most recent four fiscal quarters); or, equivalently, divide the per-share stock price by the per-share operating cash flow. In theory, the lower a stock’s price/cash flow ratio is, the better value that stock is.

Price to Earnings (P/E) Ratio

  1. The price to earnings (P/E) ratio reflects the multiple of earnings at which a stock sells.
  2. The price to earnings (P/E) ratio is calculated by dividing current price of the stock by the company’s trailing 12 months’ earnings per share.
  3. Price to earnings ratio is a common tool for comparing the prices of different common stocks and is calculated by dividing the current market price of a stock by the earnings per share.
  4. The price-earnings ratio (“P/E”) is the most common measure of how expensive a stock is.
  5. Synonymous with the term absolute price to earnings (P/E) ratio.

Price to Free Cash Flow

Price to free cash flow is a valuation metric that compares a company’s market price to its level of annual free cash flow. This is similar to the valuation measure of price-to-cash flow but uses the stricter measure of free cash flow, which reduces operating cash flow by capital expenditures. This is done as companies need to maintain or expand their asset bases (capital expenditure) to either continue growing or maintain the current levels of free cash flow.

Price to Sales (P/S) Ratio

Price to sales (P/S) ratio is a tool for calculating a stock’s valuation relative to other companies, calculated by dividing a stock’s current price by its revenue per share.

Price to Value Ratio

Price to Value describes the relationship between the market price of a security and the intrinsic value assigned to that security by an investor.


Prime refers to a classification of borrowers, rates, or holdings in the lending market that are considered to be of high quality.

Private market value

Private market value is the value of a company if each of its parts were independent, publicly traded entities.

Prospective earnings growth ratio (PEG ratio)

Prospective earnings growth ratio (PEG ratio) is the projected one-year annual growth rate, determined by taking the consensus forecast of next year’s earnings, less this year’s earnings, and dividing the result by this year’s earnings

Quantitative Easing (QE)

Quantitative Easing (QE) is a monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply.


Range-bound: When a market, or the value of a particular stock, bond, commodity or currency, moves within a relatively tight range for a certain period of time.

Return on Enterprise Value (ROEV)

Return on Enterprise Value (ROEV) is a stock valuation ratio that can be useful for comparing the values of different companies. It is simply net cash flow divided by enterprise value.

Return On Equity

Return on equity measures the rate of return on the ownership interest of the common stock owners equal to a fiscal year’s net income (after preferred stock dividends but before common stock dividends) divided by total equity (excluding preferred shares), expressed as a percentage.

Return On Invested Capital (ROIC)

Return on invested capital (ROIC) is a calculation used to assess a company’s efficiency at allocating the capital under its control to profitable investments. The return on invested capital measure gives a sense of how well a company is using its money to generate returns.

Return of Capital

Return of Capital is return from an investment that is not considered income. This is when some or all of the money an investor has in an investment is paid back to them; it is not considered a gain of any type because it is not in excess of the original investment.


S-Curve businesses are characterized by a shallow start, where only early adopters and niche markets buy the product or invest in the company. Then they experience a rapid growth, and the product or business has a dominant position in the market. After the rapid growth, these businesses maintain a high performance level but with little growth, which often signals a mature but saturated market.

Sequential Growth

Sequential growth is a measure of a company’s short-term financial performance that compares the results achieved in a recent period to those of the period immediately preceding it.

Sharpe Ratio

Sharpe Ratio is measure of a fund’s return relative to its risk. The Sharpe ratio uses standard deviation to measure a fund’s risk-adjusted returns. The higher a fund’s Sharpe ratio, the better a fund’s returns have been relative to the risk it has taken on. Because it uses standard deviation, the Sharpe ratio can be used to compare risk-adjusted returns across all fund categories.


Investors who sell short believe the price of the stock will decrease in value. A “short” position is generally the sale of a stock you do not own.

Sortino Ratio

Sortino Ratio is a modification of the Sharpe ratio that differentiates harmful volatility from general volatility by taking into account the standard deviation of negative asset returns, called downside deviation.

Standard Deviation

Standard deviation is a statistical measure of the historical volatility of a mutual fund or portfolio, usually computed using 36 monthly returns.

Structured finance

Structured finance is a complex financial instrument offered to borrowers with unique and sophisticated needs.

Stub Equity

Stub Equity is a stock being sold for a greatly reduced price as a result of serious financial difficulties. Stub equity is considered a risky investment but can offer high payoffs if the company is able to turn around their financials.


Subprime refers to the credit quality of particular borrowers, who have weakened credit histories and a greater risk of loan default than prime borrowers. The market for lenders and borrowers of subprime credit includes the business of subprime mortgages, subprime auto loans and subprime credit cards, as well as various securitization products that use subprime debt as collateral.


Swap is, traditionally, the exchange of one security for another to change the maturity (bonds), quality of issues (stocks or bonds), or because investment objectives have changed.

Swaption (swap option)

Swaption (swap option) is the option to enter into an interest rate swap. In exchange for an option premium, the buyer gains the right but not the obligation to enter into a specified swap agreement with the issuer on a specified future date.

Tangible Book Value Per Share

Tangible Book Value Per Share – TBVPS is a method of valuing a company on a per-share basis by measuring its equity after removing any intangible assets.

Tier 1 Ratio

Tier 1 Ratio is a comparison between a banking firm’s core equity capital and total risk-weighted assets.

Treasury Inflation-Protected Securities

Treasury Inflation-Protected Securities, or TIPS, are securities whose principal is tied to the Consumer Price Index (CPI) . The principal increases with inflation and decreases with deflation. When the security matures, the U.S. Treasury pays the original or adjusted principal, whichever is greater. TIPS pay interest every six months.

Upside/downside capture

Upside/downside capture is a statistical measure that shows whether a given fund has outperformed–gained more or lost less than–a broad market benchmark during periods of market strength and weakness, and if so, by how much.


United States (domestic) equities represented by the total US capitalization-weighted equity market.

VIX: Chicago Board Options Exchange (CBOE) Volatility Index

VIX Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30 day volatility. The Index is constructed using the implied volatility of a wide range of S&P 500 Index Options.

West Texas Intermediate (WTI)

West Texas Intermediate (WTI) is a grade of crude oil used as a benchmark in oil pricing.

Yield Curve

Yield Curve: A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. The curve is used to predict changes in economic output and growth.

Yield to Maturity

Yield to Maturity is the rate of return anticipated on a bond if it is held until the maturity date.

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