Financial Terms

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Definition of Parameter

Parameter Image 1


A representation that characterizes a part of a model (e.g. a growth rate), the value of which is
determined outside of the model. See: exogenous variable.

Related Terms:

Exogenous variable

A variable whose value is determined outside the model in which it is used. Also called
a parameter.

Measurement error

Errors in measuring an explanatory variable in a regression that leads to biases in
estimated parameters.

Monte-Carlo simulation

A mathematical modeling process. For a model that
has several parameters with statistical properties, pick a set of random values
for the parameters and run a simulation. Then pick another set of values, and
run it again. Run it many times (often 10,000 times) and build up a statistical
distribution of outcomes of the simulation. This distribution of outcomes is
then used to answer whatever question you are asking.

Accounting Errors

Unintentional mistakes in financial statements. Accounted for by restating
the prior-year financial statements that are in error.

Benchmark error

Use of an inappropriate proxy for the true market portfolio.

Continuous random variable

A random value that can take any fractional value within specified ranges, as
contrasted with a discrete variable.

decision variable

an unknown item for which a linear programming
problem is being solved

Parameter Image 1

dependent variable

an unknown variable that is to be predicted
using one or more independent variables

Discrete random variable

A random variable that can take only a certain specified set of discrete possible
values - for example, the positive integers 1, 2, 3, . . .

Endogenous variable

A value determined within the context of a model.

Errors and Omissions Insurance

Insurance coverage purchased by the agent/broker which provides protection against loss incurred by a client because of some negligent act, error, oversight, or omission by the agent/broker.


An adjective indicating that something is determined by forces unrelated to the theory determining the variables under investigation.

Exogenous Expenditure

See autonomous expenditure.

independent variable

a variable that, when changed, will
cause consistent, observable changes in another variable;
a variable used as the basis of predicting the value of a
dependent variable

key variable

a critical factor that management believes will
be a direct cause of the achievement or nonachievement
of the organizational goals and objectives

Net errors and omissions

In balance of payments accounting, net errors and omissions record the statistical
discrepancies that arise in gathering balance of payments data.

Parameter Image 2

Normal random variable

A random variable that has a normal probability distribution.

Performance measurement

The calculation of the return realized by a money manager over some time interval.

physical measurement allocation

a method of allocating a joint cost to products that uses a common physical characteristic as the proration base

Random variable

A function that assigns a real number to each and every possible outcome of a random experiment.

Semi-variable costs

Costs that have both fixed and variable components.

slack variable

a variable used in a linear programming problem
that represents the unused amount of a resource at
any level of operation; it is associated with less-than-orequal-
to constraints

Standard error

In statistics, a measure of the possible error in an estimate.

standard error of the estimate

a measure of dispersion that reflects the average difference between actual observations and expected results provided by a regression line

surplus variable

a variable used in a linear programming problem that represents overachievement of a minimum requirement; it is associated with greater-than-or-equal-to constraints

Tracking error

In an indexing strategy, the difference between the performance of the benchmark and the
replicating portfolio.


A value determined within the context of a model. Also called endogenous variable.

Parameter Image 3

Variable annuities

Annuity contracts in which the issuer pays a periodic amount linked to the investment
performance of an underlying portfolio.

Variable Annuity

A form of annuity policy under which the amount of each benefit is not guaranteed or specified. The amounts fluctuate according to the earnings of a separate investment account.

Variable cost

A cost that is directly proportional to the volume of output produced. When production is zero,
the variable cost is equal to zero.

Variable cost

A cost that increases or decreases in proportion with increases or decreases in the volume of production of goods or services.

variable cost

a cost that varies in total in direct proportion
to changes in activity; it is constant on a per unit basis

Variable cost

A cost that changes in amount in relation to changes in a related activity.
The difference between an actual measured result and a basis, such as a budgeted amount.

variable cost ratio

the proportion of each revenue dollar
represented by variable costs; computed as variable costs
divided by sales or as (1 - contribution margin ratio)

Variable costing

A method of costing in which only variable production costs are treated as product costs and in which all fixed (production and non-production) costs are treated as period costs.

variable costing

a cost accumulation and reporting method
that includes only variable production costs (direct material,
direct labor, and variable overhead) as inventoriable
or product costs; it treats fixed overhead as a period cost;
is not acceptable for external reporting and tax returns

variable costs

Costs that change as the level of output changes.


Those that vary with the amount of goods you produce or sell. These may include utility bills, labor, etc.

variable expenses

Expenses that change with changes in either sales volume
or sales revenue, in contrast to fixed expenses that remain the same
over the short run and do not fluctuate in response to changes in sales
volume or sales revenue. See also revenue-driven expenses and unitdriven

Variable life insurance policy

A whole life insurance policy that provides a death benefit dependent on the
insured's portfolio market value at the time of death. Typically the company invests premiums in common
stocks, and hence variable life policies are referred to as equity-linked policies.

variable overhead efficiency variance

the difference between budgeted variable overhead based on actual input activity and variable overhead applied to production

variable overhead spending variance

the difference between total actual variable overhead and the budgeted amount of variable overhead based on actual input activity

Variable price security

A security, such as stocks or bonds, that sells at a fluctuating, market-determined price.

Variable rate CDs

Short-term certificate of deposits that pay interest periodically on roll dates. On each roll
date, the coupon on the CD is adjusted to reflect current market rates.

Variable rate loan

Loan made at an interest rate that fluctuates based on a base interest rate such as the
Prime Rate or LIBOR.

Variable rated demand bond (VRDB)

Floating rate bond that can be sold back periodically to the issuer.







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