Definition of Security selection decision

Security selection decision

Choosing the particular securities to include in a portfolio.

Security market line

Line representing the relationship between expected return and market risk.
security market plane A plane that shows the equilibrium between expected return and the beta coefficient
of more than one factor.
security selection
See: security selection decision.

Adverse selection

A situation in which market participation is a negative signal.

Asset allocation decision

The decision regarding how an institution's funds should be distributed among the
major classes of assets in which it may invest.

Asset-backed security

A security that is collateralized by loans, leases, receivables, or installment contracts
on personal property, not real estate.

Convertible security

A security that can be converted into common stock at the option of the security holder,
including convertible bonds and convertible preferred stock.

Country selection

A type of active international management that measures the contribution to performance
attributable to investing in the better-performing stock markets of the world.

Currency selection

Asset allocation in which the investor chooses among investments denominated in
different currencies.

Decision tree

Method of representing alternative sequential decisions and the possible outcomes from these decisions.

Derivative security

A financial security, such as an option, or future, whose value is derived in part from the
value and characteristics of another security, the underlying security.

Exchangeable Security

security that grants the security holder the right to exchange the security for the
common stock of a firm other than the issuer of the security.

Financing decisions

decisions concerning the liabilities and stockholders' equity side of the firm's balance
sheet, such as the decision to issue bonds.

Fixed-dollar security

A nonnegotiable debt security that can be redeemed at some fixed price or according to
some schedule of fixed values, e.g., bank deposits and government savings bonds.

Host security

The security to which a warrant is attached.

Hybrid security

A convertible security whose optioned common stock is trading in a middle range, causing
the convertible security to trade with the characteristics of both a fixed-income security and a common stock
instrument.

Investment decisions

decisions concerning the asset side of a firm's balance sheet, such as the decision to
offer a new product.

Managerial decisions

decisions concerning the operation of the firm, such as the choice of firm size, firm
growth rates, and employee compensation.

Monthly income preferred security (MIP)

Preferred stock issued by a subsidiary located in a tax haven.
The subsidiary relends the money to the parent.

Mortgage pass-through security

Also called a passthrough, a security created when one or more mortgage
holders form a collection (pool) of mortgages sells shares or participation certificates in the pool. The cash
flow from the collateral pool is "passed through" to the security holder as monthly payments of principal,
interest, and prepayments. This is the predominant type of MBS traded in the secondary market.

Mutually exclusive investment decisions

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

Primitive security

An instrument such as a stock or bond for which payments depend only on the financial
status of the issuer.

Security

Piece of paper that proves ownership of stocks, bonds and other investments.

Security characteristic line

A plot of the excess return on a security over the risk-free rate as a function of
the excess return on the market.

Security deposit (initial)

Synonymous with the term margin. A cash amount of funds that must be deposited
with the broker for each contract as a guarantee of fulfillment of the futures contract. It is not considered as
part payment or purchase. Related: margin

Security deposit (maintenance)

Related: Maintenance margin security market line (SML). A description of
the risk return relationship for individual securities, expressed in a form similar to the capital market line.

Self-selection

Consequence of a contract that induces only one group (e.g. low risk individuals) to participate.

Stock selection

An active portfolio management technique that focuses on advantageous selection of
particular stocks rather than on broad asset allocation choices.

Underlying security

Options: the security subject to being purchased or sold upon exercise of an option
contract. For example, IBM stock is the underlying security to IBM options. Depository receipts: The class,
series and number of the foreign shares represented by the depository receipt.

Variable price security

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

Security Market Line

A graph illustrating the equilibrium relationship between the
expected rate of return on securities and their risk as measured by
the beta coefficient

decision making

the process of choosing among the alternative
solutions available to a course of action or a problem
situation

decision variable

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

financing decision

a judgment made regarding the method
of raising funds that will be used to make acquisitions; it
is based on an entity’s ability to issue and service debt and
equity securities

investment decision

a judgment about which assets will be
acquired by an entity to achieve its stated objectives

make-or-buy decision

a decision that compares the cost of
internally manufacturing a component of a final product
(or providing a service function) with the cost of purchasing
it from outside suppliers (outsourcing) or from another
division of the company at a specified transfer price

outsourcing decision

see make-or-buy decision

preference decision

the second decision made in capital project evaluation in which projects are ranked according to their impact on the achievement of company objectives

screening decision

the first decision made in evaluating capital
projects; it indicates whether a project is desirable based
on some previously established minimum criterion or criteria
(see also preference decision)

special order decision

a situation in which management must determine a sales price to charge for manufacturing or service jobs outside the company’s normal production/service market

Fixed-income security

A security that pays a specified cash flow over a
specific period. Bonds are typical fixed-income securities.

Marketable security

An easily traded investment, such as treasury bills, which is
recorded as a current asset, since it is easily convertible into cash.

Security

Either the collateral on a loan, or some type of equity ownership or debt, such
as a stock option or note payable.

capital budgeting decision

decision as to which real assets the firm should acquire.

decision tree

Diagram of sequential decisions and possible outcomes.

financing decision

decision as to how to raise the money to pay for investments in real assets.

floating-rate security

security paying dividends or interest that vary with short-term interest rates.

security market line

Relationship between expected return and beta.

Employee Retirement Income Security Act of 1974 (ERISA)

A federal Act that sets minimum operational and funding standards for employee benefit
plans.

Social Security Act of 1935

A federal Act establishing Old Age and Survivor’s
Insurance, which was funded by compulsory savings by wage earners.

Available-for-Sale Security

A debt or equity security not classified as a held-to-maturity security or a trading security. Can be classified as a current or noncurrent investment depending on the intended holding period.

Debt Security

A security representing a debt relationship with an enterprise, including a government
security, municipal security, corporate bond, convertible debt issue, and commercial
paper.

Equity Security

An ownership interest in an enterprise, including preferred and common stock.

Held-to-Maturity Security

A debt security for which the investing entity has both the positive
intent and the ability to hold until maturity.

Nonmarketable Security

A debt or equity security for which there is no posted price or bidand-
ask quotation available on a securities exchange or over-the-counter market.

Security

A share or an interest in a property or an enterprise such as a stock certificate or a bond.

Trading Security

A debt or equity security bought and held for sale in the near term to generate income on short-term price changes.

Security

Collateral offered by a borrower to a lender to secure a loan.

Security Value

The monetary value placed on security by a lender in determining the extent to which it can make loans against such security.

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