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Definition of Rebalancing

Rebalancing Image 1


Realigning the proportions of assets in a portfolio as needed.

Related Terms:

Index Portfolio Rebalancing Service (IPRS)

Index Portfolio rebalancing Service (IPRS) is a comprehensive investment service that can help increase potential returns while reducing volatility. Several portfolios are available, each with its own strategic balance of Index Funds. IPRS maintains your personal asset allocation by monitoring and rebalancing your portfolio semi-annually.

Leverage rebalancing

Making transactions to adjust (rebalance) a firm's leverage ratio back to its target.

Dynamic hedging

A strategy that involves rebalancing hedge positions as market conditions change; a
strategy that seeks to insure the value of a portfolio using a synthetic put option.

Active portfolio strategy

A strategy that uses available information and forecasting techniques to seek a
better performance than a portfolio that is simply diversified broadly. Related: passive portfolio strategy

Arms index

Also known as a trading index (TRIN)= (number of advancing issues)/ (number of declining
issues) (Total up volume )/ (total down volume). An advance/decline market indicator. Less than 1.0 indicates
bullish demand, while above 1.0 is bearish. The index often is smoothed with a simple moving average.

Bond indexing

Designing a portfolio so that its performance will match the performance of some bond index.

Buying the index

Purchasing the stocks in the S&P 500 in the same proportion as the index to achieve the
same return.

Rebalancing Image 1

Complete portfolio

The entire portfolio, including risky and risk-free assets.

Concentration services

Movement of cash from different lockbox locations into a single concentration
account from which disbursements and investments are made.

Consumer Price Index (CPI)

The CPI, as it is called, measures the prices of consumer goods and services and is a
measure of the pace of U.S. inflation. The U.S.Department of Labor publishes the CPI very month.

Consumer Price Index (CPI)

An index calculated by tracking the cost of a typical bundle of consumer goods and services over time. It is commonly used to measure inflation.

Debt leverage

The amplification of the return earned on equity when an investment or firm is financed
partially with borrowed money.

Debt service

Interest payment plus repayments of principal to creditors, that is, retirement of debt.

Debt-service coverage ratio

Earnings before interest and income taxes plus one-third rental charges, divided
by interest expense plus one-third rental charges plus the quantity of principal repayments divided by one
minus the tax rate.

Debt service parity approach

An analysis wherein the alternatives under consideration will provide the firm
with the exact same schedule of after-tax debt payments (including both interest and principal).

Dedicating a portfolio

Related: cash flow matching.

Rebalancing Image 2

degree of operating leverage

a factor that indicates how a percentage change in sales, from the existing or current
level, will affect company profits; it is calculated as contribution
margin divided by net income; it is equal to (1 - margin of safety percentage)

degree of operating leverage (DOL)

Percentage change in profits given a 1 percent change in sales.

EAFE index

The European, Australian, and Far East stock index, computed by Morgan Stanley.

Efficient portfolio

A portfolio that provides the greatest expected return for a given level of risk (i.e. standard
deviation), or equivalently, the lowest risk for a given expected return.
Efficient set Graph representing a set of portfolios that maximize expected return at each level of portfolio

Enhanced indexing

Also called indexing plus, an indexing strategy whose objective is to exceed or replicate
the total return performance of some predetermined index.

Excess return on the market portfolio

The difference between the return on the market portfolio and the
riskless rate.

Factor portfolio

A well-diversified portfolio constructed to have a beta of 1.0 on one factor and a beta of
zero on any other factors.

Feasible portfolio

A portfolio that an investor can construct given the assets available.

Feasible set of portfolios

The collection of all feasible portfolios.

Financial leverage

Use of debt to increase the expected return on equity. Financial leverage is measured by
the ratio of debt to debt plus equity.

financial leverage

The equity (ownership) capital of a business can serve
as the basis for securing debt capital (borrowing money). In this way, a
business increases the total capital available to invest in its assets and
can make more sales and more profit. The strategy is to earn operating
profit, or earnings before interest and income tax (EBIT), on the capital
supplied from debt that is more than the interest paid on the debt capital.
A financial leverage gain equals the EBIT earned on debt capital
minus the interest on the debt. A financial leverage gain augments earnings
on equity capital. A business must earn a rate of return on its assets
(ROA) that is greater than the interest rate on its debt to make a financial
leverage gain. If the spread between its ROA and interest rate is unfavorable,
a business suffers a financial leverage loss.

financial leverage

Debt financing amplifies the effects of changes in operating income on the returns to stockholders.

Financial leverage clientele

A group of investors who have a preference for investing in firms that adhere to
a particular financial leverage policy.

Financial leverage ratios

Related: capitalization ratios.

Full-service lease

Also called rental lease. Lease in which the lessor promises to maintain and insure the
equipment leased.

grade (of product or service)

the addition or removal of product
or service characteristics to satisfy additional needs, especially price

Hedged portfolio

A portfolio consisting of the long position in the stock and the short position in the call
option, so as to be riskless and produce a return that equals the risk-free interest rate.

Highly leveraged transaction (HLT)

Bank loan to a highly leveraged firm.

Homemade leverage

Idea that as long as individuals borrow (or lend) on the same terms as the firm, they can
duplicate the affects of corporate leverage on their own. Thus, if levered firms are priced too high, rational
investors will simply borrow on personal accounts to buy shares in unlevered firms.


A series of numbers measuring percentage changes over time from a base period. The index number for the base period is by convention set equal to 100.
Linking money payments to a price index to hold the real value of those money payments constant.


An index is a statistical measure of a market based on the performance of a sample of securities in that market. For example, the S&P/TSX Composite index reflects the performance of the most actively traded stocks on The Toronto Stock Exchange.

Index and Option Market (IOM)

A division of the CME established in 1982 for trading stock index
products and options. Related: Chicago Mercantile Exchange (CME).

Index arbitrage

An investment/trading strategy that exploits divergences between actual and theoretical
futures prices.

Index fund

Investment fund designed to match the returns on a stockmarket index.

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.

Index model

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

Index option

A call or put option based on a stock market index.

Index warrant

A stock index option issued by either a corporate or sovereign entity as part of a security
offering, and guaranteed by an option clearing corporation.


The adjustment of benefits to compensate for the effects of inflation.

Indexed bond

Bond whose payments are linked to an index, e.g. the consumer price index.


A passive instrument strategy consisting of the construction of a portfolio of stocks designed to
track the total return performance of an index of stocks.

Information services

Organizations that furnish investment and other types of information, such as
information that helps a firm monitor its cash position.

Internal Revenue Service

A federal agency empowered by Congress to interpret and enforce tax-related laws.

Jensen index

An index that uses the capital asset pricing model to determine whether a money manager
outperformed a market index. The "alpha" of an investment or investment manager.


The use of debt financing.


he use of debt financing.


The relationship between interest bearing debt and equity in a company(financial leverage) or the effect of fixed expense on after tax earnings(operating leverage).

Leverage clientele

A group of shareholders who, because of their personal leverage, seek to invest in
corporations that maintain a compatible degree of corporate leverage.

Leverage ratios

Measures of the relative contribution of stockholders and creditors, and of the firm's ability
to pay financing charges. Value of firm's debt to the total value of the firm.

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.

Leveraged buyout

The purchase of one business entity by another, largely using borrowed
funds. The borrowings are typically paid off through the future cash flow of
the purchased entity.

Leveraged buyout (LBO)

A transaction used for taking a public corporation private financed through the use
of debt funds: bank loans and bonds. Because of the large amount of debt relative to equity in the new
corporation, the bonds are typically rated below investment grade, properly referred to as high-yield bonds or
junk bonds. Investors can participate in an LBO through either the purchase of the debt (i.e., purchase of the
bonds or participation in the bank loan) or the purchase of equity through an LBO fund that specializes in
such investments.

leveraged buyout (LBO)

Acquisition of the firm by a private group using substantial borrowed funds.

Leveraged equity

Stock in a firm that relies on financial leverage. Holders of leveraged equity face the
benefits and costs of using debt.

Leveraged lease

A lease arrangement under which the lessor borrows a large proportion of the funds needed
to purchase the asset and grants the lender a lien on the assets and a pledge of the lease payments to secure the

Leveraged portfolio

A portfolio that includes risky assets purchased with funds borrowed.

Leveraged portfolio

A portfolio that includes risky assets purchased with funds borrowed.

Leveraged required return

The required return on an investment when the investment is financed partially by debt.

market index

Measure of the investment performance of the overall market.

Market portfolio

A portfolio consisting of all assets available to investors, with each asset held -in
proportion to its market value relative to the total market value of all assets.

market portfolio

portfolio of all assets in the economy. In practice a broad stock market index, such as the Standard & Poor's Composite, is used to represent the market.

Market Portfolio

The total of all investment opportunities available to the investor.

Market value-weighted index

An index of a group of securities computed by calculating a weighted average
of the returns on each security in the index, with the weights proportional to outstanding market value.

Markowitz efficient portfolio

Also called a mean-variance efficient portfolio, a portfolio that has the highest
expected return at a given level of risk.

Markowitz efficient set of portfolios

The collection of all efficient portfolios, graphically referred to as the
Markowitz efficient frontier.

McNamara-O'Hara Service Contract Act of 1965

A federal Act requiring federal contractors to pay those employees working on a federal contract at
least as much as the wage and benefit levels prevailing locally.

Mean-variance efficient portfolio

Related: Markowitz efficient portfolio

Minimum-variance portfolio

The portfolio of risky assets with lowest variance.
Minority interest An outside ownership interest in a subsidiary that is consolidated with the parent for
financial reporting purposes.

Modern portfolio theory

Principles underlying the analysis and evaluation of rational portfolio choices
based on risk-return trade-offs and efficient diversification.

Net benefit to leverage factor

A linear approximation of a factor, T*, that enables one to operationalize the
total impact of leverage on firm value in the capital market imperfections view of capital structure.

Non-financial services

Include such things as freight, insurance, passenger services, and travel.

Normal portfolio

A customized benchmark that includes all the securities from which a manager normally
chooses, weighted as the manager would weight them in a portfolio.

Operating leverage

Fixed operating costs, so-called because they accentuate variations in profits.

operating leverage

A relatively small percent increase or decrease in
sales volume that causes a much larger percent increase or decrease in
profit because fixed expenses do not change with small changes in sales
volume. Sales volume changes have a lever effect on profit. This effect
should be called sales volume leverage, but in practice it is called operating
operating liabilities
The short-term liabilities generated by the operating
(profit-making) activities of a business. Most businesses have three types
of operating liabilities: accounts payable from inventory purchases and
from incurring expenses, accrued expenses payable for unpaid expenses,
and income tax payable. These short-term liabilities of a business are
non-interest-bearing, although if not paid on time a business may be
assessed a late-payment penalty that is in the nature of an interest

operating leverage

the proportionate relationship between
a company’s variable and fixed costs

operating leverage

Degree to which costs are fixed.

Optimal portfolio

An efficient portfolio most preferred by an investor because its risk/reward characteristics
approximate the investor's utility function. A portfolio that maximizes an investor's preferences with respect
to return and risk.

Optimization approach to indexing

An approach to indexing which seeks to Optimize some objective, such
as to maximize the portfolio yield, to maximize convexity, or to maximize expected total returns.

Passive portfolio

A market index portfolio.

Passive portfolio strategy

A strategy that involves minimal expectational input, and instead relies on
diversification to match the performance of some market index. A passive strategy assumes that the
marketplace will reflect all available information in the price paid for securities, and therefore, does not
attempt to find mispriced securities. Related: active portfolio strategy


A collection of investments, real and/or financial.


A collection of securities and investments held by an investor

Portfolio Diversification

See diversification

Portfolio insurance

A strategy using a leveraged portfolio in the underlying stock to create a synthetic put
option. The strategy's goal is to ensure that the value of the portfolio does not fall below a certain level.

Portfolio internal rate of return

The rate of return computed by first determining the cash flows for all the
bonds in the portfolio and then finding the interest rate that will make the present value of the cash flows
equal to the market value of the portfolio.

Portfolio management

Related: Investment management

Portfolio manager

Related: Investment manager

Portfolio opportunity set

The expected return/standard deviation pairs of all portfolios that can be
constructed from a given set of assets.

Portfolio separation theorem

An investor's choice of a risky investment portfolio is separate from his
attitude towards risk. Related:Fisher's separation theorem.

Portfolio turnover rate

For an investment company, an annualized rate found by dividing the lesser of
purchases and sales by the average of portfolio assets.

Portfolio variance

Weighted sum of the covariance and variances of the assets in a portfolio.

Portfolio Weight

The percentage of a total portfolio represented by a single specific
security. It is calculated by dividing the value of the investment in a
specific security by the value of the investment in the total portfolio.

present value index

see profitability index

Price Index

A measure of the price level calculated by comparing the cost of a bundle of goods and services in a given year with its cost in a base year. See also index.

Product/service mix

See sales mix.







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