Glossary

A-E

alpha

The value of the intercept in the capital asset pricing model. It is the risk-adjusted excess return

annual turnover

The lesser of total purchase or sales transactions divided by total value of portfolio for the past 12 months.

arithmetic mean return

The arithmetic mean is commonly referred to as the “average.” This measure shows what the average return has been and is commonly used for forecasting purposes.

asset allocation

In attribution analysis, excess return derived from overweighting and underweighting specific asset classes relative to the benchmark.

asset selection

Contribution of active return due to the specific assets themselves with no common factor influences.

Determines the portion of excess return attributable to asset allocation and security selection.

batting average

Ratio of the number of periods the portfolio outperforms the benchmark relative to the total number of periods.

beta

Sensitivity of a stock (portfolio) to the market (benchmark) in the capital asset pricing model. It is comprised of the volatility of a stock and its correlation with the market (benchmark).

Alpha over the given period divided by the tracking error. The beta-adjusted information ratio adjusts the alpha for the amount of active risk taken. Alpha per unit of active risk.

book value

Accounting value of the firm. Total value of the company's assets that shareholders would theoretically receive if the company were liquidated. Calculated by Compustat.

bottom-up research

Research that focuses on finding outstanding performance in individual stocks before taking into account the impact of larger economic trends.

capital

Measure of financial leverage calculated by dividing total liabilities by the company's financial resources available for use using Compustat data.

capital asset pricing model

Widely known quantitative finance model. States the return of a stock can be modeled by a constant (alpha) plus the market times another constant (beta) plus some random deviation.

cash flow

Current price of a security (split adjusted) divided by cash flow per share (past 12 months cash flow divided by total shares outstanding). Calculated using Compustat cash flow data with Russell/Mellon pricing. Aggregated using the market value-weighted harmonic mean.

contribution to portfolio return

The time-weighted return of a given security multiplied by the security's weight in the portfolio.

correlation

A measure of the linear association between two variables. A value of 1 means a direct linear relationship, a value of -1 means an inverse linear relationship, and a value of 0 means no linear association

currency sensitivity

debt-equity

Measure of financial leverage calculated by dividing the company's total liabilities by a shareholder's equity (market capitalization) using Compustat data

dividend yield

Computes a measure of predicted dividend yield using the past history of dividends and the market price behavior of the stock.

down capture

Performance of the portfolio during down markets divided by the performance of the index during down markets.

down market

A period in which the index posts a negative return, irrespective of the portfolio's performance

duration

A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates.

earnings valuation

Measures historical earnings variability and cash flow fluctuations.

earnings yield

Combines current and historical earnings-to-price ratios (inverse of price-to-earnings) with a measure of analyst predicted earnings-to-price.

efficient frontier

The set of portfolios that maximize return for each level of risk.

excess return

Portfolio return minus the benchmark return

F-J

forecast 1 year eps forecast

Median value of I/B/E/S 1-year earnings per share forecasts.

geometric mean return

The geometric mean is used to compute average compound growth rates given a sequential series of periodic growth rates (i.e., it is the "actual" return received by the investor).

growth

Characterizes a firm's growth in a number of aspects, particularly earnings. Looks at the five-year payout, growth in assets, earnings growth and recent earnings changes.

holdings-based style analysis

Percentage of securities held in portfolio that are constituents of the given style index.

information ratio

Excess return over the given period divided by the tracking error. The information ratio adjusts the excess return for the amount of active risk taken. Excess return per unit of active risk.

K-Q

large blend

Securities held in both the Russell 1000 Growth Index AND the Russell 1000 Value Index

large growth

Securities held in the Russell 1000 Growth Index

large value

Securities held in the Russell 1000 Value Index

leverage

Measures financial leverage using market leverage, book leverage, debt-to-assets, and senior debt rating.

marginal contribution to active risk

The amount you would expect the overall tracking error to increase given a one percent increase in the weight of the security.

market capitalization

Total dollar value of all outstanding shares. It is calculated by multiplying the current price by the outstanding number of shares.

market timing

Contribution to active return that is due to the manager's decision to hold assets that hold a higher or lower beta on average, relative to the benchmark's assets.

maximum drawdown

The maximum loss that the manager ever incurred during any sub period of the overall time period. Conceptually, this shows the worst peak to trough performance.

momentum

Captures sustained relative performance and its effect on risk. Uses relative strength and historical alphas.

multiple

A synonym for P/E. See price-to-earnings ratio

non-estimation universe

Flags companies outside the estimation universe. It allows the linear factor model to be extended to stocks outside the estimation universe.

number of holdings

Total number of securities held at the ending period.

R-V

return on equity

Profitability measure constructed by Compustat as the ratio of the company's net income to shareholder's equity (total assets minus liabilities).

return-based style analysis

Attempts to statistically determine the manager's investment "style" allocation over a given period by creating a portfolio of indices which best resemble the portfolio's return with the lowest tracking error.

risk indicies

Contribution to active return that is due to the portfolio's risk index exposures, as defined by Barra, relative to the benchmark.

roe 5 yr average

ROE 5yr Average Annualized return on equity of the security, calculated by Compustat, compounded quarterly over 5 years and divided by 5.

r-squared

Measure of the quality of a linear regression. A value close to 1 indicates that the model is well specified.

sales

Current price of a security (split adjusted) divided by revenue per share (past 12 months revenue divided by total shares outstanding). Calculated using Compustat revenue data with Russell/Mellon pricing. Aggregated using the dollar-weighted harmonic mean.

security selection

In attribution analysis, excess return derived from selecting securities which generate a return greater than that the benchmark return.

sharpe ratio

Average return over the given period minus the average return of cash divided by the standard deviation of the portfolio. Measures the outperformance relative to cash given the amount of absolute risk taken.

size

Differentiates between large-cap and small-cap stocks using the logarithm of market capitalization.

size non-linearity

Captures the deviations from the linear relationship between returns and the logarithm of the market capitalization. Also called the midcap effect. Calculated by the cube of the logarithm of the market capitalization.

small blend

Securities held in both the Russell 2000 Growth Index AND the Russell 2000 Value Index

small growth

Securities held in the Russell 2000 Growth Index

small value

Securities held in the Russell 2000 Value Index

standard deviation

A measure of dispersion that indicates the way the returns are centered about the mean return.

tracking error

Volatility of the excess return. Measures how far the portfolio returns are likely to vary from the benchmark returns

Contribution to active return due to the difference between the buy-and-hold return and the accounting return.

Relative activity of a firm's shares in the market using descriptors such as turnover, indicator of forward splits, and volume to variance.

treynor ratio

Average return over the given period minus the average return of cash divided by the portfolio's beta. Measures the outperformance relative to cash given the amount of market risk taken

up capture

Performance of the portfolio during up markets divided by the performance of the index during up markets.

up market

A period in which the index posts a positive return, irrespective of the portfolio's performance.

value

Distinguishes between value stocks and growth stocks using the ratio of book value of equity to market capitalization. Value are low price-to-book securities, whereas growth securities have high price-to-book.

volatility

Captures relative volatility using both long-term historical volatility and near-term volatility (such as high-low price ratio, daily standard deviation). Other market proxies for volatility (volume beta) are also included.

W-Z

weighted mean

Dollar weighted mean. Larger holdings of specific securities have a greater influence on the calculation than smaller holdings.

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