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Glossary
The terms and their definitions set forth below represent how such terms are typically used or understood by Dimensional and may not be applicable in all situations or usages.
| Book-to-Market (BtM) Ratio | The "BtM" is the ratio of a firm's book value of equity to its market value of equity. Book value of equity is determined by the firm's accountants using historic cost information. Market value of equity is determined by buyers and sellers of the stock using current information. A high (low) BtM ratio indicates that the book value per share is high (low) relative to the stock price.Book-to-Market
=
book value per share
stock price
|
| Convexity | Convexity is the ratio of change in duration for a given change in yield—the change in the slope of the price as a function of a change in yield (second derivative of the price function). In general, convexity increases with longer maturities and smaller coupons and yields.
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| Correlation Coefficient (ρ) | The correlation coefficient measures the degree to which the movements of two variables are related. It indicates how close the residuals are to the regression line and is calculated as the square root of the coefficient of determination.correlation coefficient
=
covariancex,y
(σx) (σy)
=
(βx) (βy) (σ2market)
(σx) (σy)
σx = standard deviation of "x"
σy = standard deviation of "y" βx = beta of "x" βy = beta of "y" σ2market = variance of the market portfolio |
| Cost of Capital | A company issues stock (or debt) in exchange for capital to fund its operations. The investor provides this capital by purchasing shares (or bonds) in exchange for an expected return. Because the company foregoes the return on the stock or debt it issues, its cost of capital is identical to the investor's expected return.
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| Covariance | Covariance measures the degree to which two variables move together over time relative to their individual mean returns. It is calculated by multiplying the correlation between two variables by the standard deviation for each of the variables.Covariance
= ρ (σx) (σy) |
| Current Yield | Current yield is calculated as the annual interest on a fixed income security divided by its market price.
=
annual interest payment
bond price
|
| Degrees of Freedom | The degrees of freedom is the number of values in the calculation of a statistic that are free to vary—the total number of observations in the sample minus the number of samples.
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| Dependent Variable | The dependent variable is a response variable (i.e., expected return) whose behavior is to be measured as a result of the manipulation of independent variables in an experiment. Ideally, the dependent variable should be reliable, sensitive, and easy to measure.
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| Dividend Yield | Dividend yield is the contribution to annual total return that an investor earns by receiving dividends. It is determined by dividing the dividend per share by the current stock price.Dividend Yield
=
dividend per share
stock price
|
| Duration | Duration measures bond price volatility by calculating the weighted average term-to-maturity of a bond's cash flows, where the weights are the present value of each cash flow as a percentage of the bond's full price. Duration rises with maturity, falls with the frequency of coupon payments, and falls as current yields rise (higher yields reduce the present value of the cash flows).
(approx.)=
σ [(t) (PVcf)]
bond price
t = year of cash flow
PVcf = present value of cash flow |
| Efficient Market Theory | "EMT" is the theory postulating that market prices reflect the knowledge and expectations of all investors. It asserts that any new development is instantaneously priced into a security, thus making it impossible to beat the market consistently. efficient market theory
|
| Expected Return | "E(R)" is the mean value of the probability distribution of possible returns.
Expected Return
(estimate)=
end value - beginning value + dividend
beginning value
|
| Independent Variable | An independent variable is a factor whose effects are to be studied and manipulated in an experiment (i.e., exposure to market, size, and/or value risk).
|
| Mean (average) | This measure of central tendency indicates the point at which a population of observations is measured. Equals the sum of the observations' values, divided by the number of observations.
=
σ (X)
N
X = observation value
N = number of observations |
| Median | This measure of central tendency is used to indicate the point at which a population of observations is measured. It is the point in the distribution at which 50% of the observations will have values greater than or equal to the median, and 50% less than or equal to the median. median
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| Mode | Mode is the measure of central tendency that indicates the point(s) at which a population of observations is measured. It is the value in a distribution that occurs most frequently.
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| Price-to-Book Ratio | Price-to-book is the ratio of a firm's market value of equity to its book value of equity. Market value of equity is determined by buyers and sellers of the stock using current information. Book value of equity is determined by the firm's accountants using historic cost information. A low (high) price-to-book ratio indicates that the stock price is low (high) relative to the book value per share.
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| Price-to-Earnings (PtE) Ratio | "PtE" is the ratio of the market price of a firm's common stock to its current (or predicted) earnings per share. A high (low) PtE ratio is often an indicator of market sentiment in the continued growth (decline) of a firm's earnings.price-earnings ratio
=
stock price
earnings per share
|
| Risk Premium | The risk premium is the additional return an investor requires to compensate for the risk borne.Risk Premium
|
| Risk-Free Rate | The risk-free rate is the current interest rate on a default-free bond in the absence of inflation.Risk-Free Rate
|
| Standard Deviation (σ) | Standard deviation is the statistical measure of the degree to which an individual value in a probability distribution tends to vary from the mean of the distribution.
Standard Deviation
It is widely applied in modern portfolio theory, where the past performance of securities is used to determine the range of possible future performance, and a probability is attached to each performance. Generally speaking, the greater the degree of dispersion, the greater the risk. = (σ2)1/2 σ2 = variance |
| Standard Error | The standard error measures the standard deviation of the dispersion about the regression line (least squares regression line has the smallest sum of squared errors). It is also referred to as "unsystematic variation"—the variation not explained by the regression line.
=
σ
(n)1/2
σ = standard deviation
n = sample size |