Glossary of Terms
Glossary of Terms
The acronyms used in Chapter 3 of this thesis have been made up as follows; the first two letters define the country of origin; United States or United Kingdom. The next letter dictates its frequency; Quarterly or Monthly. Together these three letters indicate the source of the data series; USQ (National Council of Real Estate Investment Fiduciaries), UKQ (Jones Lang Wootton) and UKM (Investment Property Databank). The type of returns series is given by the next letter; Total return or Capital return. Finally the sector is represented by the last letter: in the UK - all Property, Retail, Office and Industrial; in the US - all Property, Retail, Office, research and Development /office and Warehouse.
AAA
The highest credit rating given by the two main rating agencies in the US, Standard & Poor's and Moody's (Note that DDD is the lowest).
Active management
A form of fund management that involves buying and selling assets with the objective of earning positive above average returns.
Adverse selection
A problem in pricing insurance, in that persons with above-average risk are more likely to purchase insurance than those with below-average risk.
Alpha
The difference between an equity's expected return and its equilibrium expected return.
Anomaly
An empirical regularity that is not predicted by any known asset pricing model.
Approved list
A list of investments that an investment organisation deems worthy of accumulation in a given portfolio. For an organisation that uses an approved list, typically any investment on the list may be purchased by its fund managers without additional authorisation.
Arbitrage
The simultaneous purchase and sale of the same, or similar, security, in two different markets for advantageously different prices.
Arbitrage portfolio
A portfolio that requires no investment, has no sensitivity to any factor, and has a positive expected return. Strictly, a portfolio that provides inflows in some circumstances and requires no outflows under any circumstances.
Arbitrage Pricing Theory, or APT
An equilibrium model of asset pricing, which states that the expected return on a security is a linear function of the security's sensitivity to various common factors.
ARCH
Autoregressive conditional heteroscedasticity.
ARIMA
Autoregressive integrated moving average.
ARMA
Autoregressive moving average.
Asset Allocation
The process of determining the optimal division of a portfolio among available asset classes.
Banks
All banks in the United Kingdom which contribute to the banking sector.These are London clearing banks, Scottish clearing banks, Northern Ireland banks other British banks, accepting houses and the UK branches and subsidiaries of foreign banks.
BARRA
The US-based fund performance evaluation service founded by Mr.Barr Rosenberg.
Basis-point
One-hundredth of one percent.
Bear
A speculator who acts, e. g. sells equities, on an expectation of falling prices, or a person who expects prices to fall.
Bear market
A market in which investment prices are falling.
Beta coefficient (β)
A relative measure of the sensitivity of an asset's return to changes in the return on the market portfolio. Mathematically, the 0 coefficient of a security is the security's covariance with the market portfolio, divided by the variance of the market portfolio.
Bond
Interest bearing (or deeply discounted) debt security. Also an investment unit backing a unit-linked life assurance contract.
Bull
A speculator who acts e. g. buys equities on the expectation of rising prices, or a person who expects prices to rise.
Bull market
A market in which investment prices are rising.
Business rates
A tax charged on commercial real estate in the UK.
Callable Bond
The right of an issuer of securities to repay before maturity, at a given price during a specified period.
Capital Asset Pricing Model
or CAPM. An equilibrium model of asset pricing which states that the expected return on a security is a positive linear function of the security's sensitivity to changes in the market portfolio return.
CAPS
Combined Actuarial Performance Services.
Central moments
Similar to moments except that the first moment, µ, is subtracted from the random variable. Alternatively,moments about the mean.
CGT
Capital gains tax. A UK tax levied when, in real terms, investment gains are realized.
Closed-end fund
or closed-end investment company.The US near-equivalent of an investment trust in the UK. A managed investment company with an infinite life, which does not stand ready to repurchase its own shares from its owners, and rarely issues new shares beyond its initial offering.
Capital Market Line, or CML
Capital Market Line. The set of portfolios obtainable by combining the market portfolio with risk-free borrowing or lending. Assuming homogeneous expectations and perfect markets, the CML represents the efficient set.
Collateral
Real estate or securities that may be pledged by a borrower, normally as security for the repayment of a loan or overdraft.
Contingent immunisation
A form of bond management that entails both passive and active elements. Under contingent immunisation, a bond portfolio is actively managed as along as acceptable results are obtained. However, if unacceptable results occur, the portfolio is immediately immunised.
Convertible
A financial instrument which gives the holder an option to convert into another type, usually equity.
Correlation
is a measure of the strength of (linear) association between two or more variables.
Correlation coefficient
A statistical measure similar to covariance (see below), in that it measures the degree of mutual variation between two random variables. The correlation coefficient rescales covariance to facilitate comparison among pairs of random variables. The correlation coefficient is bounded by the values -1 and +1, and is defined as follows:
Corporation Tax
The UK tax on UK company profits
Covariance
A statistical measure of the relationship (the extent of mutual variation) between two random variables.
Coupon
The nominal rate of interest paid on a fixed interest security, generally annually or biannually, occasionally quarterly. It is used colloquially in the US to refer to a US Treasury note or bond.
Covenant
The undertakings contained in a lease which govern the relationship between lessor and lessee. They are usually restrictive in nature, and therefore affect the value of the property or real estate to which they relate.
CRSP
Centre for Research in Security Prices. Based in the US.
Day-of-the-week effect
An empirical regularity whereby returns appear to be lower on Mondays than on other days of the (trading) week. Also known as the Weekend effect.
DCF
Discounted Cash flow.
Debenture
A corporate fixed interest bond.
Discount rate
The rate of interest which reduces the sum of an investment's future income flow to its present value or price.
Diversification
The process of adding securities to a portfolio in order to reduce its unique risk and, thereby, its total risk.
Dividend
The cash payments made to shareholders by a company.
Dividend yield
The (current) annual dividend per share, grossed up for tax and often expressed as a percentage of the share price.
Downside-variance
The partial moment from -∞ to an arbitrary point, often at arget rate-of-return. To paraphrase,the squared negative deviations from some chosen point of reference. If this point of reference is the mean value, then downside-variance is equivalent to semi-variance.
DRT
Downside risk tolerance.
Duration
A measure of the average maturity of the stream of payments generated by a financial asset. Mathematically, duration is the weighted average of the lengths of time until the asset's remaining payments are made. The weights in this calculation are the proportion of the aset's total present value represented by the present value of the respective cash flows.
Earnings
The net profits of a company available for distribution to ordinary shareholders.
EC
European Community.
Efficient market
A market in which prices fully reflect information affecting the worth of investments.
Efficient Markets Hypothesis
A theory which states that financial markets are efficient, in that the prices in the market reflect and embody all the information that is currently available. A logical consequence of this hypothesis is that no trader or fund manager should be able to make consistently abnormal profits in a financial market.
Efficient Set, or Frontier
The set of efficient portfolios which offer invetirs both the naximum expected return for varying levels of risk (as measured by variance), and minimum risk for varying levels of expected return.
Equiated yield
The internal rate-of return − or total return p.a. − from an investment.
Equiaty
Rerfers to either the number of ordinary shares issued by companies; or ordinary shares.
Equivalent yield
The total annual return (internal rate-of-return) to be received from a reversionary real estate investment over the period to reversion, assuming no change in the property's rental value or market yield.
Exchange rate risk
The uncertainty in the return on a foreign financial asset due, to the unpredictability of the rate at which the foreign can be exchanged into the investor’s own currency.
Excess return
The difference between the return on a security and the return on the risk-free asset.
Expectation
For a random variable, the expectation is the probability weighted average outcome.
Financial market
A mechanism designed to facilitate the exchange of financial assets by bringing buyers and sellers of security Market.
Floating rate
An interest rate which is reset at regular intervals − the adjustment usually being made with reference to a key rate such as the London inter-bank offered rate.
Freehold
The highest form of land ownership under the Crown in the UK.
FRI
Full Repairing and Insuring. A lease under which the lessee is responsible for all repairs and insurance.
GARCH
Generalised Autoregressive Conditional Heteroscedasticity.
Gearing
The proportion of a company's long-term debt and preference share capital to its ordinary equity share capital. Known as leverage in the US. (Note that although the return to preference shareholders is a fixed interest rate, there is no legal obligation to pay it, hence the inclusion in net worth. However, when considering return to ordinary shareholders, it may then be appropriate to treat preference share dividends as a fixed charge. )
Gilts
Gilt-edged securities. Bonds issued by the British government. The term is also used of bonds issued by Commonwealth governments, local authorities and public agencies in the United Kingdom.
Gross fund
An institution exempt from tax e.g. pension funds and charities.
Hedge
The reduction of risk on exposure to changes in market prices/rates through taking an offsetting position.
Homogeneous expectations
Where investors possess the same perceptions of the expected returns, standard deviations and covariances of securities.
Immunisation
A bond portfolio fund management technique whereby an investor constructs a portfolio to meet a future stream of cash outflows with a high degree of certainty.
i. i. d.
Independently and identically distributed.
Isochronal
Uniform in time: having equal duration: recurring at regular intervals. (Collins Enlish Dictionary)
Income yield
An investment's annual income, often expressed as a percentage of the its price.
Index fund
An investment fund which is constructed to mimic the investment performance of a particular index, e.g. the FT-SE All-Share Index.
Inefficient portfolio
One which does not satisfy the criteria of an efficient portfolio and thus does not lie on the efficient set.
Index-linked gilts
Gilts in which the interest payments and redemption value are linked to the RPI.
Inflation hedge
An asset which preserves the value of its purchasing power over time despite changes in the price level.
Institutional grade real estate
In both the UK and US this term seems to be used as a woolly 'view' of the worth of a property to its owner. In the UK particularly, most weight is given to the strength of covenant of the tenant i.e. the possibility or otherwise of a tenant being able to meet the rent and/or staying in business throughout the remaining term of the lease. In this regard Government departments have `most favoured tenant' status. This term should not, indeed cannot, be confused with the rating of bonds which permits institutions to assessthe risk of investing in them.
Insurance companies
This term includes both life assurance and non-life/general insurance businesses in the UK. Lloyds's underwriters are not included in this category.
Interest rate risk
The uncertainty in the return on a fixed-income security caused by unanticipated fluctuations in the value of the asset owing to changes in interest rates.
Investment grade
Bonds that possess ratings permitting their purchase by the majority of institutional investors, particularly regulated financial institutions. Usually, investment grade bonds have ratings of at least BBB (S&P) or Baa (Moody's). See also `Junk'.
Investment trust
Companies quoted on the ISE that companies. They are `closed ended' with a fixed share capital, which can only be varied by shareholder consent via e. g. a rights issue. Investment trusts may hold practically any type of security, and can borrow money. Its share price is governed by supply and demand on the ISE – rather than its net asset value per share ("NAV") – and usually stands at a discount to NAV. In addition to dealing on the ISE, investors may conduct transactions with the company itself, usually at a lower, occasionally nil, commission rate. Annual management charges of UK investment trusts average between 0.3% and 0.75% p.a. Not to be confused with 'unit investment trusts' in the US (see below).
IPD
Investment Property Databank Limited.
IPO
Initial public offering.
IRR
Internal rate-of-return – an investment appraisal method which calculates the discount rate required in order to equate the present value of a future stream of net cash inflows (or outflows) with the initial investment. The method uses discounted cash flow and net present value techniques.
ISE
London International Stock Exchange.
January effect
An empirical regularity whereby returns appear to be higher in January than in other months of the year.
JLW
Jones Lang Wootton, chartered surveyors.
Junk bonds
Bonds that do not possess ratings permitting their purchase by the majority of institutional investors. Usually, junk bonds have ratings of, at most, BB (S&P) or Ba (Moody's). Also known as speculative grade bonds.
Kurtosis
is the fourth moment of a random variable. Normal random variables have a kurtosis of three.
Lessee
A tenant under a lease.
Lessor
A person who grants a lease. The head lessor is a property's freeholder.
LIBID
London inter-bank bid rate i.e. the rate of interest paid on deposits in the London inter-bank market.
LIBOR
London inter-bank offered rate. The rate of interest quoted by banks at which they are willing to lend funds for inter-bank loans and deposits. Rates are quoted on maturities ranging from overnight to five years. LIBOR is also used as a reference rate for setting (fixing) the rate on loans and e.g. floating rate instruments.
LIFFE
London International Financial Futures Exchange. Merge with the London Traded Options Market to form the London International Financial Futures and Options Exchange in 1992, but still referred to by its former acronym.
LRT
Likelihood Ratio Test
LMT
Lagrange Multiplier Test
Liquid assets
Assets which are, or quickly converted into, cash.
Market portfolio
A portfolio consisting of an investment in all securities of a particular market. The proportion invested in each security equals the percentage of the total market capitalisation represented by that security. (Note that the `true' market portfolio would be the aggregate of all assets of whatever type and wherever situate.)
Market risk
That which results from general trends in market prices and cannot be avoided by diversification; the risk of a total economic system.
Market yield
The rental yield of a property if let at its rental value; also known as the all-risk yield.
Matching
The practice of securing a distribution of assets which is equal to that of a liability, in respect of characteristics such as maturity or currency denomination.
Maturity
The time to expiry of a security − normally a debt instrument. Original maturity is the time to expiry upon the issue of the loan.
Maturity ratio
The ratio of a pension funds 'current' expenses to income.
MLR
Minimum Lending Rate.
Moments
The expected value of a random variable (first moment), its squared value (second moment), its cubed value (third moment), & c.
Money Market
The market in short-term deposits.
Moratorium
An agreed postponement of the payment of interest or repayment of debt capital.
Mortgage
A loan secured on real estate.
Mortgagee
The party which lends money by mortgage.
Mortgagor
The party which borrows money by mortgaging an investment in real estate.
MSV
Mean-semi-variance.
MPT
Modern Portfolio Theory.
MPI
Multi-period investment
Mutual fund
The US equivalent of a unit trust in the UK.
n. i. d.
Normally and identically distributed
NCREIF
The National Council of Real Estate Investment Fiduciaries, in the US.
Neglected Firm Effect
An empirical observation that companies followed by relatively few securities analysts have had abnormally high returns.
NPV
Net Present Value. The present value of future net cash flows discounted, using an appropriate interest rate, to take account of the time value of money.
NYSE
The New York Stock Exchange.
Open-ended investment companies
In essence these are unit trusts, which can redeem or issue shares (not units) on investor demand. Unlike unit trusts, they are legally structured as companies quoted on a stock market where, being open-ended, the share price should reflect the value of the assets. The first in the UK is due to be launched in January, 1997; the continental equivalent of these was first issued in Luxembourg in the early 1980's, followed by France. Quotations there seem to have been 'single priced' with no bid-offer spread, and the manager's or market maker's turn obtained via a dealing commission. These should not be confused with 'open-ended mutual funds' (see below).
Open-ended mutual fund
The US equivalent of a UK unit trust. These should not be confused with `open-ended investment companies' (see above).
Options
The right but not the obligation to buy (under a call option) or sell (under a put option) a commodity or financial instrument, in return for the payment of a premium for the option.
Outgoings
Recurrent expenses faced by an investor as an ordinary consequence of owning an investment e. g. for a real estate investor − repairs, insurance and management expenses.
Perfect market
A securities market in which no impediment to investing exists. Such impediments would include finite divisibility of securities, taxes, transaction costs, and the costs in price and/or time of information.
Point
This is occasionally confused with basis point (see above). In US stock markets, a point equals one dollar.
Portfolio Performance Evaluation
The periodic analysis of a portfolio's performance in terms of both returns earned and risks incurred.
Premium
Generally used to describe a margin (paid) above the normal price level.
PINC
Property Income Certificates.
Primary asset
Those which are in positive net supply to the investing public i.e. they are part of the market portfolio (Dybvig & Ingersoll (Dybvig and Ingersoll Jnr., 1982)).
Primary market
A market for the issue of new securities.
Probability
The probability that some specific outcome of a process will occur. This can be interpreted as the relative frequency with which that outcome would be obtained if the process were repeated a large number of times under similar conditions.
Property
This term denotes a single piece of real estate; in the UK, a particular or single building.
Property bond
An investment unit based on real estate, the performance of which determines the benefits paid out under a unit-linked life assurance scheme.
Random variable
A variable such as the return on an investment whose value depends on an uncertain future outcome. Note that the sum, product, square. logarithms, etc. of random variables are still random variables.
Rack rent
A property's rental value.
Rate-of-return
The percentage change in the value of an investment in a financial asset, or portfolio of financial assets, over a specified period.
Rating
An evaluation of the creditworthiness of a specific securities issue or borrower, made by an agency in the US such as Standard & Poor's or Moody's. Ratings grade from 'AAA’ for the most creditworthy to `DDD' for the least. Ratings change as the borrower's financial position changes. See also 'Investment grade'.
Real estate
This term refers to more than one property. See also 'Property'
Real Estate Investment Trust
or REIT. An investment fund similar to an investment company, the objective of which is to hold primarily real estate assets, either through mortgages, construction and development loans, or equity interests. See Appendix C.
Real return
Return after adjusting for inflation.
Redemption yield
The internal rate-of-return to be received from a dated bond held to maturity.
Reinvestment-rate risk
The uncertainty of the return on a fixed-income asset caused by unanticipated changes in the interest rate at which cash flows from the asset can be reinvested.
Rental value
The rent for a property if offered to let on the open market.
Rental yield
The yield on a property, as distinct from the dividend yield on equities and the interest yield on bonds.
Repurchase agreement
An agreement to sell securities and repurchase them at a later date. Both prices are agreed at the time of the initial sale. In effect this is an agreement to lend money upon collateral.
Reversion
The date upon which the current lease comes to an end.
RICS
The Royal Institution of Chartered Surveyors, in the UK.
Risk
The uncertainty associated with the end-of-period value of an investment.
Risk-adjusted return
The return on an asset or portfolio, modified to explicitly account for the risk to which the asset or portfolio is exposed.
Risk-averse investor
An investor who prefers an investment with less risk over one with more risk, assuming that both investments offer the same expected return.
Risk-less
Often incorrectly used in the literature to denote 'risk-free' (see above).
Risk-neutral investor
An investor who has no preference between investments with varying levels of risk, assuming that the investments offer the same expected return.
Risk premium
The difference between the expected yield to maturity of a risky bond, and the expected yield to maturity of a similar bond which has no possibility of default attached.
Risk-seeking investor
An investor who prefers an investment with more risk over one with less risk, assuming that both investments offer the same expected return.
Risk-tolerant
The requirement of an extra unit of return for each additional unit of risk.
RPI
Retail Price Index, in the UK.
SAPCO
Single Asset Property Companies.
Secondary market
A market for the sale and purchase of existing securities, as opposed to a market for the sale (or issue) of new securities. The latter is termed a primary market.
Securitisation
The process by which existing non-negotiable debt (such as bank loans) is changed into a security which is marketable.
Security
A legal representation of the right to receive prospective future benefits under stated conditions. Also known as a Financial Asset
SFA
Securities and Futures Authority. Monitors the day-to-day activities of investment agents/intermediaries in the UK, such as stockbrokers, and dealers and traders The SFA is a weaker version of the Securities and Exchange, and Commodity Futures Trading, Commissions in the US. Note that the latter are both federal agencies.
SIB
Securities and Investments Board. A private body, funded by the UK financial services industry, which was set up to oversee the regulatory framework established by the Financial Services Act 1986. The SIB operates largely through self-regulatory organisations such as the SFA; see above.
SML
Security Market Line. This represents the average, or normal, trade-off between risk and return for a group of securities, where risk is typically measured in terms of the equities βs.
Semi-Variance
The partial moment from –∞ to the mean. To paraphrase, the squared negative deviations from the mean.
Separation theorem
A feature of the CAPM that states that the optimal combination of risky assets for an investor can be determined without any knowledge of the investor's attitude toward risk and return.
Sharpe's Measure
or Reward-to-Variability Ratio. An ex post risk-adjusted measure of portfolio performance where risk is defined as the standard deviation of the portfolio's returns. Mathematically, it is the excess return of a portfolio divided by the standard deviation of the portfolio's excess returns, over an evaluation period.
Short sales
the ability to sell a security without owning it.
Skewness
A measure of the asymmetry of a random variable. It is the third moment of the standardised random variable. Normal random variables have a skewness of zero.
S&P
Standarad & Poor’s
Size Effect, or Small Firm Effect
An empirical regularity whereby stock returns appear to differ consistently across the range of market capitalisation. Over extended periods of time, companies with smaller capitalisations have outperformed those with larger capitalisations, on a risk adjusted basis.
SPOT
Single Property Ownership Trusts.
Spread
The difference between the buying and selling rates for financial securities and foreign exchange. It can also refer to the margin above the base rate such as LIBOR at which a specific loan is priced.
Standard Deviation
The standard deviation of a random variable is the square root of its variance.
Standardised Random Variable
Is derived from a random variable by subtracting the mean and dividing by the standard deviation.
Stock
A term often used in the US to denote an equity or share.
Stochastic process risk
In the context of immunisation, the risk that the yield curve will shift in a manner that prevents an immunised bond portfolio from producing its expected cash inflows.
Systematic risk
Incorrectly, but usually, used in financial literature to refer to Systemic Risk. This term could more usefully be employed to describe one of the risk elements in a particular system, which when combined comprise Systemic Risk.
Systemic risk
The undiversifiable element of risk, whether that be a particular market or economy.
Treasury Bill
A short-term non-interest bearing i.e. pure discount security issued by the US Treasury with a maximum term to maturity of not more than one year.
Treasury Bond
A security issued by the US Treasury with a term to maturity of over seven years. Interest is paid biannually, with the principal repaid at maturity.
Treasury Note
A security issued by the US Treasury with a term to maturity between one and seven years. Interest is paid biannually, with the principal repaid at maturity.
Treynor's Measure
or Reward-to-Volatility Ratio. An expost risk-adjusted measure of portfolio performance where risk is defined as the market risk of the portfolio. Mathematically, it is the excess return of a portfolio divided by the β of the portfolio, over an evaluation period.
Uncertainty
A condition under which more than one future outcome is possible. Under uncertainty, a distribution of possible outcomes to any investment is assumed, as the actual outcome is not known.
Unique risk, or Unsystemic risk
The portion of a security's total risk that is not related to movement in the market portfolio, and therefore can be diversified away.
Unit investment trust
A US investment company, not to be confused with UK investment trusts or unit trusts. An initial sum of capital is raised from investors, which is then used to purchase a fixed portfolio of securities, typically bonds. The company is unmanaged, and has a finite life.
Unit Trust
Trust funds which are not stock exchange listed companies, but issue units representing the value of the underlying holdings in its portfolio. At least 90% of the portfolio must be held in shares tradeable on a stock market recognised by the UK. Use of futures and options is subject to strict guidelines. Unit trust prices are directly related to the value of their portfolio, and are calculated by reference to a formula laid down by the unit trust industry's selfregulatory organisation. The number of units issued increases or reduces in accordance with investor requirements. Dealings are normally conducted through the trust's managers, with dealing commission covered by the spread in bid and offer prices, usually 5% to 6%. Unit trusts cannot borrow money, and managers invariably maintain a 'float' of funds on deposit to meet possible redemptions. Not to be confused with 'unit investment trusts' in the US (see above).
The Value of holdings
Where institutional holdings in real estate are analysed, the figures provided relate to the market 'value' at year-end.
Value-weighted market index
or capitalisation-weighted market index. The index of a market in which the contribution of a security to the value of the index is a function of the security's market capitalisation.
Variance
The second central moment of a random variable. It is equal to the value of the expected squared deviations of the possible outcomes from the mean of a random variable. In a 'normal' distribution, the variance is a measure of the width of the distribution. The variance of the return, r, on an asset is given by
where is the average or expected return. Variance-Covariance matrix
A table that symmetrically arrays the covariances between a number of random variables. Variances of the random varibales lie on the diagonal of the matrix, whereas covariances between the random variables lie above and below the diagonal.
Weak-form market efficiency
A level of market efficiency in which all previous security price and volume data are fully and immediately reflected in current security prices.
Weekend effect
An empirical regularity whereby returns appear to be lower on Mondays than on other days of the (trading) week. Also known as the Day-of-the week effect.
WFIA
Wells Fargo Investment Advisors.
Wilshire
Wilshire Associates. A fund performance evaluation service based in the US.
WM
The World Markets Company. A UK company which provides, inter alia, a fund performance evaluation service.
Yield to maturity
For a particular fixed income security, the discount rate that equates the present value of fuure promised cash flows from the security to the current market price of the security.
Yield to reversion
An alternative name for the equivalent yield.
Zero coupon bond
or pure discount bond. A bond that is promised to be repaid by just one future payment to its owner.