OBINA, Marie Hyacinth B.

Arithmetic Average Rate of Return

The rate of return on an investment that is calculated by taking the total cash inflow over the life of the investment
and dividing it by the number of years in the life of the investment. The average rate of return does not guarantee
that the cash inflows are the same in a given year; it simply guarantees that the return averages out to the average
rate.

Asset Pricing Model

Any of several models used to determine the appropriate price or return on an asset at a given level of risk.
Prominent examples include the capital asset pricing model and the arbitrage pricing theory.

Behavioral Finance
A field of finance that proposes psychology-based theories to explain stock market anomalies. Within behavioral
finance, it is assumed that the information structure and the characteristics of market participants systematically
influence individuals' investment decisions as well as market outcomes.

Cognitive Biases
A cognitive bias is a pattern of deviation in judgment that occurs in particular situations. Implicit in the concept of a
"pattern of deviation" is a standard of comparison; this may be the judgment of people outside those particular
situations, or may be a set of independently verifiable facts. The existence of some of these cognitive biases has
been verified empirically in the field of psychology.

Cognitive biases are instances of evolved mental behavior. Some are presumably adaptive, for example, because
they lead to more effective actions in given contexts or enable faster decisions when faster decisions are of greater
value. Others presumably result from a lack of appropriate mental mechanisms, or from the misapplication of a
mechanism that is adaptive under different circumstances.

Cognitive bias is a general term that is used to describe many distortions in the human mind that are difficult to
eliminate and that lead to perceptual distortion, inaccurate judgment, or illogical interpretation

Efficient Portfolio
A combination of investments that offer either the highest possible yield at a given risk level or the lowest possible
risk at a given yield level. Although the concept of an efficient portfolio is important to understand, in practice it is
more academic than practical.

Fat tail
A fat tail is a property of some probability distributions (alternatively referred to as heavy-tailed distributions)
exhibiting extremely largekurtosis particularly relative to the ubiquitous normal which itself is an example of an
exceptionally thin tail distribution. Fat tail distributions have been empirically encountered in a fair number of areas:
economics, physics, and earth sciences. Fat tail distributions have power law decay.

Expected Return
In finance, expected return can also mean the return of a bond if the bond pays out. This will always be higher than
the expected return in the other sense presented in this article because the bond paying out is the highest payout
scenario, and failure is always possible

Internal Rate of Return (IRR)

The rate of discount on an investment that equates the present value of the investment's cash outflows with the
present value of the investment's cash inflows. Internal rate of return is analogous to yield to maturity for a bond.

Markowitz Efficient Portfolio

In Markowitz Portfolio Theory, a portfolio with the highest level of return at a given level of risk. One who carries
such a portfolio cannot further diversify to increase the expected rate of return without accepting a greater amount
of risk. Likewise one cannot decrease his/her exposure to risk without proportionately decreasing the expected
return. A Markowitz efficient portfolio is determined mathematically and plotted on a chart with risk as the x-axis
and expected return as the y-axis.

Normal distribution
In probability theory, the normal (or Gaussian) distribution, is a continuous probability distribution that is
often used as a first approximation to describe real-valued random variables that tend to cluster around a single
mean value. The graph of the associated probability density function is  “bell”-shaped, and is known as the
Gaussian function or bell curve.

Standard Deviation
A statistical measure of the variability of a distribution. An analyst may wish to calculate the standard deviation of
historical returns on a stock or a portfolio as a measure of the investment's riskiness. The higher the standard
deviation of an investment's returns, the greater the relative riskiness because of uncertainty in the amount of return.

Random walk
Theory that stock price changes from day to day are accidental or haphazard; changes are independent of each other
and have the same probability distribution. Many believers in the random walk theory believe that it is impossible
to outperform the market consistently without taking additional risk.
Normative Theory
A view of human culture based upon the identification of abstract rules and general conditions that can then be
applied to a particular culture in order to explain or understand its workings or material culture. Such an approach
provides a widely used framework for studying archaeological cultures throughout time.

Any theory which seeks to explain or predict what would happen under theoretical constraints; what ought to be,
such as perfect competition, rather than what is, or will be.
risk aversion

Risky 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. If investors are
risk averse, higher-risk investments must offer higher expected yields. Otherwise, they will not be competitive with
the less risky investments

Risky Asset
An investment with a return that is not guaranteed. Assets carry varying levels of risk. For example, holding
a corporate bond is generally less risky than holding a stock. Government bonds are generally not considered
risky assets. A risky asset should not be confused with a risk 

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.

Time-Weighted Rate of Return

A measure of the compound rate of growth in a portfolio. Because this method eliminates the distorting effects
created by inflows of new money, it is used to compare the returns of investment managers. 

This is also called the "geometric mean return," as the reinvestment is captured by using the geometric total and
mean, rather than the arithmetic total and mean.

Heavy Tailed-Distribution
Some authors use the term to refer to those distributions which do not have all their power moments finite; and some
others to those distributions that do not have a variance. The definition given in this article is the most general in
use, and includes all distributions encompassed by the alternative definitions, as well as those distributions such
as log-normal that possess all their power moments, yet which are generally acknowledged to be heavy-tailed.

In probability theory, heavy-tailed distributions are probability distributions whose tails are not exponentially

bounded; that is, they have heavier tails than the exponential distribution. In many applications it is the right tail of
the distribution that is of interest, but a distribution may have a heavy left tail, or both tails may be heavy.