Glossary

beta

The beta of a share is a measure of its risk relative to the market as a whole (or its covariance with the market). The beta risk of a share is just one element of a share’s total risk or standard deviation. The other element is the risk specific to the share which can be diversified away. The capital asset pricing model shows how investors should only be rewarded for the beta risk of their investments. Beta is often abbreviated to b.

capital asset pricing model (CAPM)

A model which relates the expected return on a security to the expected return on the market as a whole and to its risk. The capital asset pricing model allows a company’s equity cost of capital to be estimated and provides performance benchmarks for equity investors.

debt/equity ratio

In financial risk analysis, this is a way to determine a company’s leverage. To calculate debt/equity ratio, a company’s long-term debt is divided by the value of its common stock.

derivatives

A future, forward or option contract. These are short term securities which establish their value (or potential exposure to risk) making reference to prices set up in another market (i.e. the market for the underlying asset).

financial risk management

Managing a risk arising from a financial based activity (e.g. foreign exchange transactions).

gearing

A measure of the amount of debt in the capital structure, typically the debt/ equity ratio which is debt as a percentage of debt plus equity capital. Gearing is a UK term, the US equivalent is leverage.

Gross Domestic Product (GDP)

The value of the economic output of an economy.

International Accounting Standards Board (IASB)

The accounting board that sets international financial reporting standards (see International Financial Reporting Standards).

International Financial Reporting Standards (IFRS)

The reporting standards for accounting standards set by the International Accounting Standards Board (IASB) (see International Accounting Standards Board).

leverage

A measure of the amount of debt in the capital structure, typically the debt/ equity ratio which is debt as a percentage of debt plus equity capital. Leverage is a US term; the UK equivalent is gearing.

mean of a distribution

The statistical average of a series of numbers or observations.

net present value (NPV)

The discounted present value of future cash flows (of, say, a project or investment) net of the cost.

portfolio theory

A model of the risk and return of a portfolio of shares.

standard deviation

A measure of volatility which is the square root of the sum of the squares of the differences between actual outcomes and the mean outcome.

wholesale funds

Funds raised from institutions via the financial markets.