What is Hedge Ratio? Hedge ratio is the ratio or comparative value of an open position’s hedge to the overall position. It is an important risk management statistic that is used to measure the extent of any potential risk that can be caused by a movement in the hedging instrument. Hedging is an investment practice…
What is the Justified Price to Earnings Ratio? The justified price to earnings ratio is the price to earnings ratio that is “justified” by using the Gordon Growth Model. This version of the popular P/E ratio uses a variety of underlying fundamental factors such as cost of equity and growth rate. Commonly shortened to “justified…
What Is Return on Assets? Return on assets (ROA) is a profitability ratio that measures how efficiently a company generates profit from its total assets, calculated by dividing net income by total assets. A higher ROA indicates a company is more effective at converting its asset investments into earnings. For example, an ROA ratio of…
What is Risk Aversion? Risk aversion refers to the tendency of an economic agent to strictly prefer certainty to uncertainty. An economic agent exhibiting risk aversion is said to be risk averse. Formally, a risk averse agent strictly prefers the expected value of a gamble to the gamble itself. What is a Gamble? A gamble…
What is Capital Rationing? Capital rationing is a strategy used by companies or investors to limit the number of projects they take on at a time. If there is a pool of available investments that are all expected to be profitable, capital rationing helps the investor or business owner choose the most profitable ones to…
What is Unconventional Cash Flow? An unconventional cash flow profile is a series of cash flows that, over time, don’t go in only one direction. It is characterized by not just one, but several changes in the direction of the cash flow. Directional changes are usually represented by the positive (+) and negative (–) signs….
Every major financial choice begins with a simple question: Does this investment create value? Understanding ROI equips you to compare options, assess potential outcomes, and allocate capital with confidence. In this guide, you’ll learn how to determine ROI by analyzing scenarios that account for initial cost, risk appetite, and an investment’s projected performance. Join over…
What is the Internal Rate of Return (IRR)? The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of a project zero. In other words, it is the expected compound annual rate of return that will be earned on a project or investment. When calculating IRR, expected cash…
What is a Short Rate Model? A short rate model is a mathematical model used in the evaluation of interest rate derivatives to illustrate the evolution of interest rates over time by determining the evolution of the short rate r(t) over time. In short rate modeling, the stochastic state variable is the spot rate at…
What is a Unicorn? In finance, “unicorn” is a term that describes a privately-owned startup with a valuation of over $1 billion. The term was introduced by venture capital investor, Aileen Lee, in 2013 to describe rare tech startups that were valued at more than $1 billion. The phenomenon of unicorns is quite controversial. Although…
