Investment Landscape and Markets Flashcard Database

Comprehensive vocabulary and formula database covering investments, funds, market efficiency, behavioral finance, factors, alternative investments, and financial performance metrics.

Investing

Committing money for long-term benefits over years or decades.

Speculating

Focusing on short-term profits over days or weeks.

Real assets

Physical assets (such as land, real estate, machinery) that determine the wealth of an economy.

Financial assets

Claims on income generated by real assets (such as stocks and bonds).

Buy Side

Market players who buy securities on behalf of clients, such as mutual funds, pension funds, and hedge funds.

Sell Side

Market players who create, structure, and distribute securities, such as investment banks, brokers, and dealers.

Mutual Fund

A strictly regulated investment fund open to retail and institutional parties, where diversification is the main component of risk management.

Hedge Fund

A less regulated investment fund for wealthy investors that uses active strategies and manages risk through hedging.

Open-End fund

A fund that can continuously issue or buy back new shares directly at the current Net Asset Value (NAV).

Closed-End fund

A fund with a fixed number of shares after the initial public offering (IPO), whose market price on the exchange deviates from the actual NAV.

Index fund

A passive fund that tracks a specific index and whose price is determined once a day (the closing price).

ETF (Exchange Traded Fund)

A passive fund that tracks an index but, unlike an index fund, is continuously traded on the exchange just like a single stock.

Loads

One-time sales or purchase costs charged at entry (front-end) or exit (back-end) of a fund.

TER / Ongoing Charges (OCF)

The total annual management and administrative costs of a fund that are automatically deducted from the NAV.

Trading costs

Internal transaction costs incurred by a fund when buying and selling securities; these are directly dependent on the portfolio turnover.

Tracking Difference

The total deviation of the fund's return relative to the promised index over a specific period (also known as the Total Cost of Ownership proxy).

Physical ETF

An ETF that owns the actual, physical stocks or bonds from the underlying index.

Stock lending

The temporary lending of physical shares by an ETF to generate extra income, which carries counterparty risk.

Synthetic ETF

An ETF that does not own physical shares but uses derivatives (a total return swap) with a bank to guarantee the index return.

Counterparty risk

The risk that the party who issued the swap (in a synthetic ETF) goes bankrupt and fails to meet its obligations.

Investment Policy Statement (IPS)

An official document formalizing an investor's objectives (return, risk) and restrictions (liquidity, taxes, ESG).

Investor Profile

The unique combination of a client's time horizon and risk tolerance, which determines the final mix of stocks, bonds, and cash.

Beyond the Status Quo

Academic research showing that a permanent $100\%$ stock portfolio ($50\%$ domestic / $50\%$ international) performs better over the entire life cycle and has a lower ruin risk than glide-path Target-Date Funds.

Ruin risk

The probability that an investor runs out of money in old age; in the long term, this risk is greater with bonds due to inflation.

Cash Account

A standard brokerage account where you invest purely with your own deposited capital.

Margin Account

An investment account that allows you to borrow money or securities from the broker to create leverage.

Initial Margin

The minimum percentage of own coverage required in the account at the moment a margin position is opened.

Maintenance Margin

The absolute bottom limit of equity during the term of a margin position.

Margin Call

A mandatory call from a broker to immediately deposit cash when equity falls below the maintenance margin due to price movements.

Short Selling

Borrowing and immediately selling shares you do not own, hoping to buy them back later at a lower price (sell high, buy low).

Short Squeeze

A market situation where a sudden price increase forces short sellers to quickly buy back their positions, causing the price to explode even further (e.g., GameStop).

Efficient Market Hypothesis (EMH)

The theory stating that financial markets process all available information directly into prices, making it impossible to consistently beat the market on a risk-adjusted basis.

Weak form EMH

A form of EMH where all historical price data is incorporated into the price; technical analysis is useless here.

Semi-strong form EMH

A form of EMH where all publicly available information is incorporated into the price; fundamental analysis yields no extra return here.

Strong form EMH

A form of EMH where all information (including insider knowledge) is incorporated into the price; insider trading is not profitable here.

Joint Hypothesis Problem

The methodological problem stating that outperformance ($\alpha$) can never be tested independently of a risk model (like CAPM); a positive alpha could mean an inefficient market or an incorrect risk model.

Prospect Theory

Behavioral theory by Kahneman & Tversky (1979) stating that people evaluate outcomes relative to a reference point rather than absolute wealth.

Loss aversion

The psychological fact that the pain of a loss is experienced as approximately twice as intense as the pleasure of an equal gain.

Risk seeking in loss

The phenomenon where people in a loss scenario are willing to take large gambles to avoid the loss.

Risk averse in gain

The phenomenon where people in a gain scenario prefer a certain, smaller amount over an uncertain larger amount.

Probability weighting

The cognitive bias where people systematically overestimate small probabilities (making lotteries and startups attractive).

Frame dependence

The bias where a decision depends heavily on how the choice is presented (framed).

Herding

The irrational imitation of the behavior of the large mass of investors.

Disposition effect

The emotional error where investors hold onto losing stocks too long and sell winning stocks too quickly.

Familiarity bias

The misconception that personal knowledge of a company or country equates to better information, leading to under-diversification.

Regret aversion

The fear of repeating previous psychological pain, which causes long-term goals to be missed.

Limits to Arbitrage

The concept (Shleifer & Vishny, 1997) that rational investors cannot always correct mispricings due to frictions, costs, or risks.

Noise Trader Risk

The risk that irrational investors (noise traders) push a price further in the wrong direction, potentially causing an arbitrageur to go bankrupt before the price corrects.

Value trap

A stock that appears cheap based on a low P/E ratio, but is actually a poor investment due to fundamental problems or high risk.

Support level

A historical price low where many buyers enter, causing the price to stop falling and rise again.

Resistance level

A historical price high where many investors take profits, causing the price to stop rising and fall again.

Breakout

The moment a market price breaks through a support or resistance level with conviction.

Bullish signal

A buy signal in technical analysis, e.g., when a short-term Moving Average crosses a long-term Moving Average from below to above.

Bearish signal

A sell signal in technical analysis, e.g., when a short-term Moving Average crosses a long-term Moving Average from above to below.

Misperceiving randomness

The human tendency to see patterns in completely random price sequences (hot-hand / gambler's fallacy).

Data snooping / Data mining

Endlessly backtesting historical data until a pattern is coincidentally found that has no predictive value for the future.

Event Study Methodology

A statistical method to test if abnormal returns (AR) occur around a specific event (such as an earnings announcement).

Strategic Asset Allocation (SAA)

The most important long-term decision where the stable baseline mix of asset classes (e.g., 60/40) is determined based on client goals.

Tactical Asset Allocation (TAA)

Deliberately deviating from the SAA in the short term to generate extra return through market timing.

Loser's Game (Stock-picking)

The concept that active stock selection is statistically doomed to lose, as only ~$1.3\%$ of global stocks are responsible for all outperformance above the risk-free rate.

Time in the market

The principle that staying permanently invested is more important than market timing, because missing the few best market days dramatically destroys terminal wealth.

Factor Investing

A systematic investment style that filters broad index funds based on specific, structural risk premiums (such as Value or Momentum).

Size premium

The empirical phenomenon that small-cap stocks on average achieve better long-term returns than large-cap stocks.

Granular Economy (Paper)

An economy/market highly concentrated around a small number of mega-companies; high concentration predicts a higher future size premium due to capital misallocation.

Momentum (11/1/1)

A strategy of buying stocks based on performance over the past 11 months, deliberately skipping 1 month ($t-1$) to avoid micro-reversals, and holding the position for 1 month.

Momentum Crash

An extreme trend reversal where the short side of a momentum portfolio (historical losers) suddenly sky-rockets after a major market crisis, leading to massive losses for the strategy.

Value-factor

Systematically overweighting stocks that are cheap relative to their book value (high Book-to-Market ratio).

Low Volatility Anomaly

The empirical discovery (contrary to CAPM) that low-risk/low-beta stocks provide risk-adjusted returns as good as or better than high-risk stocks.

Leverage Constraints

Institutional restrictions forbidding many professional funds from borrowing money; this forces them to buy high-beta stocks instead, leaving low-risk stocks structurally undervalued.

Agency Issues (Robeco)

The separation between management and asset owner; fund managers focus too rigidly on their benchmark and avoid low-volatility stocks for fear of excessive tracking error.

Quality Minus Junk (QMJ)

A fundamental factor strategy (Asness et al., 2018) that goes long profitable, growing, and safe companies, and short low-quality companies; success is explained academically by mispricing.

Drawdown

The maximum loss measured from the highest peak to the lowest trough (peak-to-trough) in a specific period.

Limited Partnership

The legal structure of most PE and hedge funds, consisting of a general partner (GP) and silent investors (LPs).

General Partner (GP)

The manager of a Private Equity or Hedge fund who makes operational decisions and closes deals.

Limited Partners (LP)

External institutional investors (such as pension funds) who purely provide the capital in an alternative structure.

High-water mark

A protection mechanism stating that a hedge fund manager may only collect a performance fee if the fund value exceeds its highest historical peak.

Hurdle rate

The minimum return (e.g., $5-8\%$) a fund must achieve before the manager is eligible for a performance fee.

Clawback

A contractual clause requiring the GP to return previously paid performance fees to LPs if the fund suffers heavy losses in later years.

Venture Capital

A Private Equity style focused on startups and young companies with high growth potential, characterized by very high risk and negative operating cash flows.

Leveraged Buyout (LBO)

A Private Equity style where a mature company with stable cash flows is acquired using a very large amount of debt (leverage).

Distressed

Investing in the debt or equity of companies experiencing significant financial or operational difficulties.

Secondaries

The secondary market within Private Equity where investors buy existing LP interests from each other for interim liquidity.

Co-investment

A structure where an LP invests directly in a specific deal alongside the PE fund, avoiding standard 2/20 fund fees on that portion.

J-Curve

The graphical representation of cumulative returns of a PE fund; negative in the early years due to capital calls and fees, then curving steeply upward in later years through exits.

Vintage Risk

Timing sensitivity in Private Equity; market conditions and the economic cycle in the fund's starting year largely determine final success.

Distribution Waterfall

The contractual order of profit distribution in a PE fund (Return of Capital $\rightarrow$ Hurdle $\rightarrow$ GP Catch-up $\rightarrow$ 80/20 Split).

Carried interest

The final performance bonus (usually the $20\%$ from the profit split) received by the GP after successfully passing through the distribution waterfall.

REIT (Real Estate Investment Trust)

A publicly traded real estate fund providing investors liquid access to a diversified portfolio of direct real estate.

Core real estate

The safest real estate strategy focused on stable, well-leased buildings in top locations with low leverage (LTV $20-30\%$).

Opportunistic real estate

The most risky real estate strategy focused on speculative project development with very high leverage (LTV >$75\%$).

Short Position Account Value Formula

$$=(\text{Number of shares}\times P_0)+\text{Initial Margin}$$

Short Position Equity Formula

$$=\text{Account Value}_{\text{short}}-(\text{Number of shares}\times P_{\text{current}})$$

Short Position Margin % Formula

$$=\frac{\text{Equity}_{\text{short}}}{\text{Number of shares} \times P_{\text{current}}}$$

Short Margin Call Price Formula

$$=\frac{P_0 \times(1 + \text{Initial Margin \%})}{1 + \text{Maintenance Margin \%}}$$

Long Position Buying Power Formula

$$=\frac{\text{Own Money}}{\text{Initial Margin \%}}$$

Long Position Borrowed Amount Formula

$$=\text{Total Buying Power}-\text{Own Money}$$

Return with Margin Formula

$$=\frac{(P_1 - P_0) \times n - (\text{Interest \%} \times\text{Borrowed amount})}{\text{Own Money}}$$

Sharpe Ratio Formula

$$=\frac{R_p - R_f}{\sigma_p}\quad(\sigma_{p}=\text{Total volatility})$$

Treynor Ratio Formula

$$=\frac{R_p - R_f}{\beta_p}\quad(\beta_{p}=\text{Systematic risk/Market risk})$$

Sortino Ratio Formula

$$=\frac{R_p - R_f}{\sigma_{\text{downside}}}\quad(\sigma_{\text{downside}}=\text{Downside volatility only})$$