Financial Terms
R squared (R^2)

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Definition of R squared (R^2)

R Squared (R^2) Image 1

R squared (R^2)

Square of the correlation coefficient proportion of the variability explained by the linear
regression model. For example, an r squared of 75% means that 75% of the variability observed in the
dependent variable is explained by the independent variable.

R squared (R^2)

Square of the correlation coefficientthe proportion of the variability in one series that can be
explained by the variability of one or more other series.

Related Terms:

Accumulated Other Comprehensive Income

Cumulative gains or losses reported in shareholders'
equity that arise from changes in the fair value of available-for-sale securities, from the
effects of changes in foreign-currency exchange rates on consolidated foreign-currency financial
statements, certain gains and losses on financial derivatives, and from adjustments for underfunded
pension plans.

All or none

Requirement that none of an order be executed unless all of it can be executed at the specified price.

All-or-none underwriting

An arrangement whereby a security issue is canceled if the underwriter is unable
to re-sell the entire issue.

Arbitrage-free option-pricing models

Yield curve option-pricing models.

Asset pricing model

A model for determining the required rate of return on an asset.

Asset pricing model

A model, such as the Capital Asset Pricing model (CAPM), that determines the required
rate of return on a particular asset.

R Squared (R^2) Image 1


An option is at-the-money if the strike price of the option is equal to the market price of the
underlying security. For example, if xyz stock is trading at 54, then the xyz 54 option is at-the-money.


The correlation of a variable with itself over successive time intervals.

Beta coefficient

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

Binomial model

A method of pricing options or other equity derivatives in
which the probability over time of each possible price follows a binomial
distribution. The basic assumption is that prices can move to only two values
(one higher and one lower) over any short time period.

Binomial option pricing model

An option pricing model in which the underlying asset can take on only two
possible, discrete values in the next time period for each value that it can take on in the preceding time period.

Black-Scholes model

The first complete mathematical model for pricing
options, developed by Fischer Black and Myron Scholes. It examines market
price, strike price, volatility, time to expiration, and interest rates. It is limited
to only certain kinds of options.

Black-Scholes option-pricing model

A model for pricing call options based on arbitrage arguments that uses
the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the standard deviation
of the stock return.

Call money rate

Also called the broker loan rate , the interest rate that banks charge brokers to finance
margin loans to investors. The broker charges the investor the call money rate plus a service charge.

Capital asset pricing model (CAPM)

An economic theory that describes the relationship between risk and
expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk
that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification.
The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security
plus a risk premium.

R Squared (R^2) Image 2

Capital Asset Pricing Model (CAPM)

A model for estimating equilibrium rates of return and values of
assets in financial markets; uses beta as a measure of asset risk
relative to market risk

capital asset pricing model (CAPM)

Theory of the relationship between risk and return which states that the expected risk
premium on any security equals its beta times the market risk premium.

coefficient of correlation

a measure of dispersion that indicates the degree of relative association existing between two variables

Coefficient of determination

A measure of the goodness of fit of the relationship between the dependent and
independent variables in a regression analysis; for instance, the percentage of variation in the return of an
asset explained by the market portfolio return.

coefficient of determination

a measure of dispersion that
indicates the “goodness of fit” of the actual observations
to the least Squares regression line; indicates what proportion
of the total variation in y is explained by the regression model

coefficient of variation

a measure of risk used when the standard deviations for multiple projects are approximately
the same but the expected values are significantly different

Common stock/other equity

Value of outstanding common shares at par, plus accumulated retained
earnings. Also called shareholders' equity.


Raw materials or subassemblies used to make either finished goods
or higher levels of subassembly.

constant-growth dividend discount model

Version of the dividend discount model in which dividends grow at a constant rate.

Constant-growth model

Also called the Gordon-Shapiro model, an application of the dividend discount
model which assumes (1) a fixed growth rate for future dividends and (2) a single discount rate.

Continuous random variable

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


See: correlation coefficient.


The simultaneous change in value of two random numeric variables.

correlation analysis

an analytical technique that uses statistical
measures of dispersion to reveal the strength of the
relationship between variables

Correlation coefficient

A standardized statistical measure of the dependence of two random variables,
defined as the covariance divided by the standard deviations of two variables.

Correlation Coefficient

A measure of the tendency of two variables to change values

Correlation coefficient

A statistic in which the covariance is scaled to a
value between minus one (perfect negative correlation) and plus one (perfect
positive correlation).

decision variable

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


Acceptance of a capital budgeting project contingent on the acceptance of another project.

dependent variable

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

Deterministic models

Liability-matching models that assume that the liability payments and the asset cash
flows are known with certainty. Related: Compare stochastic models

Discounted dividend model (DDM)

A formula to estimate the intrinsic value of a firm by figuring the
present value of all expected future dividends.

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, . . .

dividend discount model

Computation of today’s stock price which states that share value equals the present value of all expected future dividends.

Dividend discount model (DDM)

A model for valuing the common stock of a company, based on the
present value of the expected cash flows.

Dividend growth model

A model wherein dividends are assumed to be at a constant rate in perpetuity.

Dow Jones industrial average

This is the best known U.S.index of stocks. It contains 30 stocks that trade on
the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest
U.S.companies are performing. There are thousands of investment indexes around the world for stocks,
bonds, currencies and commodities.

Dow Jones Industrial Average

Index of the investment performance of a portfolio of 30 “blue-chip” stocks.

economic components model

Abrams’ model for calculating DLOM based on the interaction of discounts from four economic components.
This model consists of four components: the measure of the economic impact of the delay-to-sale, monopsony power to buyers, and incremental transactions costs to both buyers and sellers.

Endogenous variable

A value determined within the context of a model.

European Monetary System (EMS)

An exchange arrangement formed in 1979 that involves the currencies
of European Union member countries.

Exogenous variable

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

Extrapolative statistical models

models that apply a formula to historical data and project results for a
future period. Such models include the simple linear trend model, the simple exponential model, and the
simple autoregressive model.

Factor model

A way of decomposing the factors that influence a security's rate of return into common and
firm-specific influences.

Fiat Money

Fiat Money is paper currency made legal tender by law or fiat. It is not backed by gold or silver and is not necessarily redeemable in coin. This practice has had widespread use for about the last 70 years. If governments produce too much of it, there is a loss of confidence. Even so, governments print it routinely when they need it. The value of fiat money is dependent upon the performance of the economy of the country which issued it. Canada's currency falls into this category.

First-pass regression

A time series regression to estimate the betas of securities portfolios.

Garmen-Kohlhagen option pricing model

A widely used model for pricing foreign currency options.

Gordon model

present value of a perpetuity with growth.
The end-ofyear Gordon model formula is: 1/(r - g)
and the midyear formula is: SQRT(1 + r)/(r - g).

High-Powered Money

See money base.

Hot money

Money that moves across country borders in response to interest rate differences and that moves
away when the interest rate differential disappears.


A put option that has a strike price higher than the underlying futures price, or a call option
with a strike price lower than the underlying futures price. For example, if the March COMEX silver futures
contract is trading at $6 an ounce, a March call with a strike price of $5.50 would be considered in-the-money
by $0.50 an ounce.
Related: put.

Independent Broker

This is a provincial government licensed independent businessperson who usually represents five or more life insurance companies in a sales and service capacity and who is paid a commission by those life insurance companies for sales and service of life insurance products. We for example, have been in business for 12 years and regularly place new business with over twenty different life insurance companies.

Independent project

A project whose acceptance or rejection is independent of the acceptance or rejection of
other projects.

independent project

an investment project that has no specific
bearing on any other investment project

Independent Projects

A situation where an increase (or decrease) in the benefits of one
project has no effect on the benefits of another project. Also, a
situation where the acceptance of one project does not preclude
the acceptance of another project.

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

Index model

A model of stock returns using a market index such as the S&P 500 to represent common or
systematic risk factors.

Information Coefficient (IC)

The correlation between predicted and actual stock returns, sometimes used to
measure the value of a financial analyst. An IC of 1.0 indicates a perfect linear relationship between predicted
and actual returns, while an IC of 0.0 indicates no linear relationship.

input-output coefficient

a number (prefaced as a multiplier
to an unknown variable) that indicates the rate at which each
decision variable uses up (or depletes) the scarce resource

International Monetary Fund

An organization founded in 1944 to oversee exchange arrangements of
member countries and to lend foreign currency reserves to members with short-term balance of payment

International Monetary Fund (IMF)

Organization originally established to manage the postwar fixed exchange rate system.

International Monetary Market (IMM)

A division of the CME established in 1972 for trading financial
futures. Related: Chicago Mercantile Exchange (CME).

Internet business model

a model that involves
(1) few physical assets,
(2) little management hierarchy, and
(3) a direct pipeline to customers

key variable

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

Law of one price

An economic rule stating that a given security must have the same price regardless of the
means by which one goes about creating that security. This implies that if the payoff of a security can be
synthetically created by a package of other securities, the price of the package and the price of the security
whose payoff it replicates must be equal.

law of one price

Theory that prices of goods in all countries should be equal when translated to a common currency.

least squares regression analysis

a statistical technique that investigates the association between dependent and independent variables; it determines the line of "best fit" for a set of observations by minimizing the sum of the Squares
of the vertical deviations between actual points and the
regression line; it can be used to determine the fixed and
variable portions of a mixed cost

Linear programming

Technique for finding the maximum value of some equation subject to stated linear constraints.

linear programming

a method of mathematical programming used to solve a problem that involves an objective function and multiple limiting factors or constraints long-term variable cost a cost that was traditionally viewed as a fixed cost

Linear regression

A statistical technique for fitting a straight line to a set of data points.

Log-linear least-squares method

A statistical technique for fitting a curve to a set of data points. one of the
variables is transformed by taking its logarithm, and then a straight line is fitted to the transformed set of data

log size model

Abrams’ model to calculate discount rates as a function of the logarithm of the value of the firm.

Market model

This relationship is sometimes called the single-index model. The market model says that the
return on a security depends on the return on the market portfolio and the extent of the security's
responsiveness as measured, by beta. In addition, the return will also depend on conditions that are unique to
the firm. Graphically, the market model can be depicted as a line fitted to a plot of asset returns against
returns on the market portfolio.

Markowitz model

A model for selecting an optimum investment portfolio,
devised by H. M. Markowitz. It uses a discrete-time, continuous-outcome
approach for modeling investment problems, often called the mean-variance
paradigm. See Efficient frontier.

method of least squares

see least Squares regression analysis


The process of creating a depiction of reality, such as a graph, picture, or mathematical


School of economic thought stressing the importance of the money supply in the economy. Adherents believe that the economy is inherently stable, so that policy is best undertaken through adoption of a policy rule.

Monetarist Rule

Proposal that the money supply be increased at a steady rate equal approximately to the real rate of growth of the economy. Contrast with discretionary policy.

Monetary Aggregate

Any measure of the economy's money supply.

Monetary Base

See money base.

Monetary gold

Gold held by governmental authorities as a financial asset.

Monetary / non-monetary method

Under this translation method, monetary items (e.g. cash, accounts
payable and receivable, and long-term debt) are translated at the current rate while non-monetary items (e.g.
inventory, fixed assets, and long-term investments) are translated at historical rates.

Monetary policy

Actions taken by the Board of Governors of the Federal Reserve System to influence the
money supply or interest rates.

Monetary Policy

Actions taken by the central bank to change the supply of money and the interest rate and thereby affect economic activity.

Monetizing the Debt

See printing money.


Any item that serves as a medium of exchange, a store of value, and a unit of account. See medium of exchange.

Money base

Composed of currency and coins outside the banking system plus liabilities to the deposit money banks.

Money Base

Cash plus deposits of the commercial banks with the central bank.

Money center banks

Banks that raise most of their funds from the domestic and international money markets, relying less on depositors for funds.

Money Laundering

This is the process by which "dirty money" generated by criminal activities is converted through legitimate businesses into assets that cannot be easily traced back to their illegal origins.

Money management

Related: Investment management.

Money manager

Related: Investment manager.

Money market

Money markets are for borrowing and lending money for three years or less. The securities in
a money market can be U.S.government bonds, treasury bills and commercial paper from banks and

Money Market

A market that specializes in trading short-term, low-risk, very liquid
debt securities

money market

Market for short-term financial assets.







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