Investment Glossary

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Random-walk hypothesis

the hypothesis that past share prices are of no value in forecasting future prices because past, current and future prices merely reflect market responses to information coming into the market at random. In short, price movements are no more predictable than the pattern of the walk of a drunk. This hypothesis implies that technical analysis is useless in its attempts to predict future price movements in the market. - See also Efficient Market.

Rating agencies

companies that grade securities so as to indicate the quality of the securities for investors. The two major rating services are Moody's Investor Services and Standard & Poor's Corporation.

Real interest rate

the nominal current interest rate less the rate of inflation. For example, an investor holding a 10% certificate of deposit during a period of 6% annual inflation would be earning a real interest rate of 4%. The real interest rate is a more valid measure of the desirability of an investment than the nominal rate. See also Nominal Return

Real return

the inflation-adjusted rate of return on an investment. If an investor earns a return of 12% during a year when inflation is 4%, the real return is 8%. See also Nominal Return

Recession

an extended decline in general business activity. Usually defined as three consecutive quarters of falling real gross domestic product. A recession affects different securities in different ways. For example, holders of high quality bonds stand to benefit since inflation and interest rates may decline. Conversely, shareholders of manufacturing firms may see company profits and dividends drop.

Redemption

the retirement of a security. While generally used in reference to the repurchase of a bond before maturity, the term also applies to unit trusts and other collective investment schemes. - See also Repurchase.

Regression analysis

measurement of the change in one variable as a result of changes in one or more variables. Regression analysis is used frequently in an attempt to identify the variables that affect a certain share's price.

Remainderman

the person or organisation that is to receive the remaining interest in a property or estate after prior interests have been satisfied.

Repurchase

Term used variously when a company buys back its own shares or when a fund manager buys units back from an investor. - See also Redemption. Note, for taxation purposes, the terms 'redemption' and 'repurchase' have different meanings and different tax implications for investors in NZ unit trusts).

Required rate of return

1 - the minimum rate of return that an investment must provide or must be expected to provide in order to justify its acquisition. For example, an investor who can earn an annual return of 6% on bank deposits may set a required rate of return of 10% on a more risky share investment before considering a shift of funds. An investment's required return is a function of the returns available on other investments and of the risk level inherent in a particular investment. 2 - the minimum rate of return required by an investor, which limits the types of investments the investor can undertake. For example, a person with a required rate of return of 15% would generally have to invest in relatively risky securities.

Reverse annuity mortgage (RAM)

a mortgage in which a homeowner's equity is gradually depleted by a series of payments from the mortgage holder to the homeowner. Thus, a reverse annuity mortgage increases in size as the annuity payments continue. A reverse annuity mortgage is used primarily by elderly homeowners wishing to convert the equity in their homes into a stream of retirement income payments.

Risk

Uncertainty. Unpredictability. See also Volatility

Risk adjusted

pertaining to a variable, such as the return on an investment, that has been altered in order to account for the differences in risk among variables of the same type. For example, financial managers adjust expected returns on various investment projects for risk in order to make them comparable.

Risk aversion

the tendency of investors to avoid risky investments. Thus, if two investments offer the same expected yield but have different risk characteristics, investors will choose the one with the lowest variability in returns. In a risk averse world, higher-risk investments must offer higher expected yields, otherwise, they will not be competitive with less risky investments.

Risk premium

the additional yield in excess of the risk-free rate required by investors to compensate for additional risk inherent in a particular investment. For example, any issuer other than the US government normally must pay investors a risk premium in the form of a higher interest rate on bonds to account for the fact that the default and liquidity risk is less on US government securities that on securities of other issuers.

Risk-free return

the annualised rate of return on riskless investment. This is the rate against which other returns are measured. It is usually determined by the rate on short term government securities.

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