Financial Terms Beta equation (Mutual Funds)

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# Definition of Beta equation (Mutual Funds)

## Beta equation (Mutual Funds)

The beta of a fund is determined as follows:
[(n) (sum of (xy)) ]-[ (sum of x) (sum of y)]
[(n) (sum of (xx)) ]-[ (sum of x) (sum of x)]
where: n = # of observations (36 months)
x = rate of return for the S&P 500 Index
y = rate of return for the fund

# Related Terms:

## Alpha equation

The alpha of a fund is determined as follows:
[ (sum of y) -((b)(sum of x)) ] / n
where:
n =number of observations (36 months)
b = beta of the fund
x = rate of return for the S&P 500
y = rate of return for the fund

## Balanced mutual fund

This is a fund that buys common stock, preferred stock and bonds. The same as a
balanced fund.

## Beta (Mutual Funds)

The measure of a fund's or stocks risk in relation to the market. A beta of 0.7 means
the fund's total return is likely to move up or down 70% of the market change; 1.3 means total return is likely
to move up or down 30% more than the market. beta is referred to as an index of the systematic risk due to
general market conditions that cannot be diversified away.

## Beta equation (Stocks)

The beta of a stock is determined as follows:
[(n) (sum of (xy)) ]-[(sum of x) (sum of y)]
[(n) (sum of (xx)) ]-[(sum of x) (sum of x)]
where: n = # of observations (24-60 months)
x = rate of return for the S&P 500 Index
y = rate of return for the stock

## Cost of funds

Interest rate associated with borrowing money.

## Country beta

Covariance of a national economy's rate of return and the rate of return the world economy
divided by the variance of the world economy.

## Dividend yield (Funds)

Indicated yield represents return on a share of a mutual fund held over the past 12
months. Assumes fund was purchased 1 year ago. Reflects effect of sales charges (at current rates), but not
redemption charges.

## Endowment funds

Investment funds established for the support of institutions such as colleges, private
schools, museums, hospitals, and foundations. The investment income may be used for the operation of the
institution and for capital expenditures.

## Expected return-beta relationship

Implication of the CAPM that security risk premiums will be
proportional to beta.

## Federal funds

Non-interest bearing deposits held in reserve for depository institutions at their district Federal
Reserve Bank. Also, excess reserves lent by banks to each other.

## Federal funds market

The market where banks can borrow or lend reserves, allowing banks temporarily
short of their required reserves to borrow reserves from banks that have excess reserves.

## Federal funds rate

This is the interest rate that banks with excess reserves at a Federal Reserve district bank
charge other banks that need overnight loans. The Fed funds rate, as it is called, often points to the direction
of U.S. interest rates.

## Foreign market beta

A measure of foreign market risk that is derived from the capital asset pricing model.

## Forward Fed funds

Fed funds traded for future delivery.

## Fundamental beta

The product of a statistical model to predict the fundamental risk of a security using not
only price data but other market-related and financial data.

## Funds From Operations (FFO)

Used by real estate and other investment trusts to define the cash flow from
trust operations. It is earnings with depreciation and amortization added back. A similar term increasingly
used is funds Available for Distribution (FAD), which is FFO less capital investments in trust property and
the amortization of mortgages.

## Leveraged beta

The beta of a leveraged required return; that is, the beta as adjusted for the degree of
leverage in the firm's capital structure.

## Mutual fund

mutual funds are pools of money that are managed by an investment company. They offer
investors a variety of goals, depending on the fund and its investment charter. Some funds, for example, seek
to generate income on a regular basis. Others seek to preserve an investor's money. Still others seek to invest
in companies that are growing at a rapid pace. funds can impose a sales charge, or load, on investors when
they buy or sell shares. Many funds these days are no load and impose no sales charge. mutual funds are
investment companies regulated by the Investment Company Act of 1940.
Related: open-end fund, closed-end fund.

## Mutual fund theorem

A result associated with the CAPM, asserting that investors will choose to invest their
entire risky portfolio in a market-index or mutual fund.

## Mutual offset

A system, such as the arrangement between the CME and SIMEX, which allows trading
positions established on one exchange to be offset or transferred on another exchange.

## Mutually exclusive investment decisions

Investment decisions in which the acceptance of a project
precludes the acceptance of one or more alternative projects.

## No load mutual fund

An open-end investment company, shares of which are sold without a sales charge.
There can be other distribution charges, however, such as Article 12B-1 fees. A true "no load" fund will have
neither a sales charge nor a distribution fee.

## Objective (mutual fund)

The fund's investment strategy category as stated in the prospectus. There are
more than 20 standardized categories.

## Regression equation

An equation that describes the average relationship between a dependent variable and a
set of explanatory variables.

## Surplus funds

Cash flow available after payment of taxes in the project.

## Term Fed Funds

Fed funds sold for a period of time longer than overnight.

## 12b-1 funds

mutual funds that do not charge an upfront or back-end commission, but instead take out up to
1.25% of average daily fund assets each year to cover the costs of selling and marketing shares, an
arrangement allowed by the SEC's Rule 12b-I (passed in 1980).

## Unleveraged beta

The beta of an unleveraged required return (i.e. no debt) on an investment when the
investment is financed entirely by equity.

## Zero-beta portfolio

A portfolio constructed to represent the risk-free asset, that is, having a beta of zero.

## Accounting equation

The representation of the double-entry system of accounting such that assets are equal to liabilities plus capital.

## Shareholdersâ€™ funds

The capital invested in a business by the shareholders, including retained profits.

## Accounting equation

The formula Assets = Liabilities + Equity.

## accounting equation

An equation that reflects the two-sided nature of a
business entity, assets on the one side and the sources of assets on the
other side (assets = liabilities + ownersâ€™ equity). The assets of a business
entity are subject to two types of claims that arise from its two basic
sources of capitalâ€”liabilities and ownersâ€™ equity. The accounting equation
is the foundation for double-entry bookkeeping, which uses a
scheme for recording changes in these basic types of accounts as either
debits or credits such that the total of accounts with debit balances
equals the total of accounts with credit balances. The accounting equation
also serves as the framework for the statement of financial condition,
or balance sheet, which is one of the three fundamental financial
statements reported by a business.

## Beta

A measure of the riskiness of a specific security compared to the
riskiness of the market as a whole; measure of the systematic risk
of a security or a portfolio of securities

## mutually exclusive projects

a set of proposed capital projects from which one is chosen, causing all the others to be rejected

## mutually inclusive projects

a set of proposed capital projects that are all related and that must all be chosen if the primary project is chosen

## Beta

The price volatility of a financial instrument relative to the price
volatility of a market or index as a whole. beta is most commonly used with
respect to equities. A high-beta instrument is riskier than a low-beta
instrument.

## beta

Sensitivity of a stockâ€™s return to the return on the market
portfolio.

## internally generated funds

Cash reinvested in the firm; depreciation plus earnings not paid out as dividends.

## mutually exclusive projects

Two or more projects that cannot be pursued simultaneously.

## Equation of Exchange

The quantity theory equation Mv = PQ.

## Federal Funds Rate

The interest rate at which banks lend deposits at the Federal Reserve to one another overnight.

## Beta coefficient

A measurement of the extent to which the returns on a given stock move with stock market.

## Beta risk

Risk of a firm measured from the standpoint of an investor who holds a highly diversified portfolio.

## Labour-Sponsored Venture Funds

Venture capital corporations established by labour unions. They function as other venture capital corporations but are subject to government regulation.

## EFT (electronic funds transfer)

funds which are electronically credited to your account (e.g. direct deposit), or electronically debited from your account on an ongoing basis (e.g. a pre-authorized monthly bill payment, or a monthly loan or mortgage payment). A wire transfer is a form of EFT.

## growth funds

mutual funds that seek long-term capital growth. This type of fund invests primarily in equity securities.

## income funds

mutual funds that seek regular income. This type of fund invests primarily in government, corporate and other types of bonds, debt securities, and other income producing securities and in certain circumstances can also hold common and preferred shares.

## index funds

mutual funds that aim to track the performance of a specific stock or bond index. This process is also referred to as indexing and passive management.

## mutual fund

When you buy a mutual fund, you are pooling your money with that of other investors. An investment professional called a portfolio advisor takes that money and invests it for all the investors in a variety of different securities as determined by the investment objectives of the mutual fund. This gives you the benefit of diversification that is, being invested in many different investments at once.

## NSF (non-sufficient funds)

This appears on your statement if there are insufficient funds in your account to cover a cheque that you have written or a pre-authorized payment that you have already arranged. You will be charged a service fee for non-sufficient funds.

## savings funds

mutual funds that seek to preserve capital. This type of fund invests primarily in short-term securities with an average term to maturity of one year or less, or in the case of money market funds, 90 days or less.

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