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Glossary of Financial Terms: A

  • Alpha
    A measure of selection risk (also known as residual risk) of a mutual fund in relation to the market. A positive alpha is the extra return awarded to the investor for taking a risk, instead of accepting the market return. For example, an alpha of 0.4 means the fund outperformed the market-based return estimate by 0.4 %. -0.6 means a fund's monthly return was 0.6 % less than would have been predicted from the change in the market alone.

  • Alpha Equation
    The alpha of a fund is determined as follows:
    [ (sum of y) - ((b)(sum of x)) ] / n
    where: n =number of observations (36 mos)
    b = beta of the fund
    x = rate of return for the S&P 500
    y = rate of return for the fund

  • American depositary receipts
    Certificates issued by a U.S. Depositary Bank, representing foreign shares held by the bank, usually by a branch or correspondent in the country of issue. One ADR may represent a portion of a foreign share, one share or a bundle of shares of a foreign corporation. If the ADR's are "sponsored," the corporation provides financial information and other assistance to the bank and may subsidize the administration of the ADR's. "Unsponsored" ADR's do not receive such assistance. ADR's carry the same currency, political and economic risks as the underlying foreign share; the prices of the two, adjusted for the SDR/ordinary ratio, are kept essentially identical by arbitrage. American Depositary Shares (ADS) are a similar form of certification.

  • American-style option
    An option contract that can be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American style.

  • Analyst
    Employee of a brokerage or fund management house who studies companies and makes buy and sell recommendations on their stocks. Most specialize in a specific industry.

  • Annual report
    Yearly record of a publicly held company's financial condition. It includes a description of the firm's operations, its balance sheet and income statement. SEC rules require that it be distributed to all shareholders. A more detailed version is called a 10-K.

  • Arbitrage
    Profiting from differences in the price of a single security that is traded on more than one market.

  • Arms Index
    Also known as TRading INdex (TRIN):= #advancing issues/#declining issues
    Total up volume/total down volume
    An advance/decline market indicator. Less than 1.0 indicates bullish demand, while above 1.0 is bearish. The index often is smoothed with a simple moving average.

  • Assignment
    The receipt of an exercise notice by an options writer that requires him to sell (in the case of a call) or purchase (in the case of a put) the underlying security at the specified strike price.

  • At the money
    An option is at-the-money if the strike price of the option is equal to the market price of the underlying security. For example, if xyz stock is trading at 54, then the xyz 54 option is at-the-money.

  • Autoregressive
    Using previous data to predict future data.

  • Average
    An arithmetic mean of selected stocks intended to represent the behavior of the market or some component of it. One good example is the widely quoted Dow Jones Industrial Average, which adds the current prices of the 30 DJIA's stocks, and divides the results by a predetermined number, the divisor.

  • Average maturity
    The average time to maturity of securities held by a mutual fund. Changes in interest rates have greater impact on funds with longer average life.


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