What is the Preferred Habitat Theory? The preferred habitat theory states that the market for bonds is ‘segmented’ by term structure and that bond market investors have preferences for these segments. According to the theory, bond market investors prefer to invest in a specific part or ‘habitat’ of the term structure. The preferred habitat theory…
What is the Segmented Markets Theory? The segmented markets theory states that the market for bonds is ‘segmented’ on the basis of the bonds’ term structure, and that ‘segmented’ markets operate more or less independently. Under the segmented markets theory, the return offered by a bond with a specific term structure is determined solely by…
What is the Russell 2000? The Russell 2000 is a stock market index that tracks the performance of 2,000 US small-cap stocks from the Russell 3000 index. The Russell 2000 index is widely quoted as a benchmark for mutual funds that consist primarily of small-cap stocks. It is also a benchmark for the performance of small-cap…
What is Open Outcry? Open outcry is a trading method used in futures pits and stock exchanges where traders use verbal and nonverbal signals to communicate. Before the advent of electronic trading, nearly all financial trading was conducted via open outcry. This is the picture people see of stockbrokers on TV shouting and using hand…
What is the Required Rate of Return? The required rate of return (hurdle rate) is the minimum return that an investor is expecting to receive for their investment. Essentially, the required rate is the minimum acceptable compensation for the investment’s level of risk. The required rate of return is a key concept in corporate finance…
What is Fundamental Analysis? In accounting and finance, fundamental analysis is a method of assessing the intrinsic value of a security by analyzing various macroeconomic and microeconomic factors. The ultimate goal of fundamental analysis is to quantify the intrinsic value of a security. The security’s intrinsic value can then be compared to its current market…
What are Commodities? Commodities are another class of assets, just like stocks and bonds. Most commodities are products that come from the earth that possess uniform quality, are produced in large quantities, and are produced by many different producers. Major commodities include cotton, oil, gas, corn, wheat, oranges, gold, and uranium. Basically, they are the…
What is an Overweight Stock? An overweight stock is a stock that financial analysts believe will outperform a benchmark stock, security, or index. The overweight recommendation signals to investors to devote a larger percentage of their portfolio to the stock. Hence the term “overweight”. Different institutions use different terms for their stock recommendations. “Buy” and…
What is Tracking Error? Tracking error is a measure of financial performance that determines the difference between the return fluctuations of an investment portfolio and the return fluctuations of a chosen benchmark. The return fluctuations are primarily measured by standard deviations. Generally, a benchmark is a diversified market index that represents part of the total…
What is Cross Border Listing? Cross border listing involves companies that trade on the stock exchange of their home country and also on a stock exchange in another country. A Cross Border Listing gives rise to the possibility of arbitrage opportunities, as identical assets are trading in two different markets. Cross border listed companies are…
