The Risk Limited Glossary
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Accrual Bond - a bond on which interest accrues, but is not paid to the investor during the time of accrual. The amount of accrued interest is added to the principal of the bond and is paid at maturity.
Actuals - the physical commodity underlying a futures contract. Also referred to as the cash commodity or the physicals.
AICPA - an acronym for the American Institute of Certified Public Accountants, a professional association representing CPA's in the U.S.
Algorithm - a defined, finite sets of steps, operations, or procedures that will produce a particular outcome (e.g. computer programs, mathematical formulas, and recipes).
Alpha - a measure of the difference between a fund's actual returns and its expected returns given its risk level as measured by its Beta. The Alpha is a measure of risk adjusted performance. An Alpha is usually generated by regressing the security, portfolio or mutual fund's excess return on the S&P 500 excess return. The Beta adjusts for the risk (the slope coefficient). The Alpha is the intercept and is also know as the Jensen Index.
Altman Z Score - a credit scoring system developed in 1968 by Dr. Edward I. Altman, a financial economist and professor at New York University's Stern School of Business, to predict the probability of a company entering bankruptcy within a twelve month period. The Altman Z-score model is widely used as a guide to predict financial distress. The model indicates bankruptcy when Z is less than 1.20, and survival when Z is greater than 2.90.
The Z-score is though not a substitute for an in-depth analysis and should not be used in isolation as a basis for making credit and investment decisions. The Z score has five ratios that are given different weights. These five ratios are: working capital / total assets; retained earnings / total assets; EBIT / total assets; market value of total equity / book value of total liabilities (for public companies); and sales / total assets.
American Option - an option contract that may be exercised at any time prior to expiration. This differs from a European Option, which may only be exercised on the expiration date.
Annualized Return - a return calculated over one period, but adjusted to be comparable to a return calculated over a year.
Arbitrage - a trading and investment technique to cash-in on price differences between related markets, indices, or futures contracts based on those indices.
ARCH - an acronym for autoregressive conditional heteroskedasticity.
Arithmetic Mean - the sum of a list of numbers, divided by the number of numbers. See also Average below.
Asset Allocation - an investment strategy based on allocation of percentages of an investment portfolio between stocks, bonds, or other asset classes.
Asian Option - an exotic option whose payoff depends on the price movements of the underlying asset during some portion of the life of the option.
Autocorrelation - the correlation between a component of a stochastic process and itself lagged a certain period of time.
Average - usually denotes the arithmetic mean (see above), but it can also denote the median, the mode, the geometric mean, and weighted means, among other things.
Average Price Option - an average rate option; see below. Also referred to as an APO.
Average Rate Option - a form of Asian option whose payoff is linked to the average underlier value over a specified period. Although somewhat more complex to price relative to traditional European or American option structures, Average Rate Options are popular since they provide a price hedge that better matches price exposures that are based on daily averages, such as purchase/consumption of energy on a daily basis.
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