Definition of Fundamental descriptors

Fundamental descriptors

In the model for calculating fundamental beta, ratios in risk indexes other than
market variability, which rely on financial data other than price data.

Fundamental analysis

Security analysis that seeks to detect misvalued securities by an analysis of the firm's
business prospects. Research analysis often focuses on earnings, dividend prospects, expectations for future
interest rates, and risk evaluation of the firm.

Fundamental beta

The product of a statistical model to predict the fundamental risk of a security using not
only price data but other market-related and financial data.

Technical descriptors

Variables that are used to describe the market on a technical basis.

fundamental analysts

Analysts who attempt to find under- or overvalued securities by analyzing fundamental information, such as earnings, asset values, and business prospects.

BARRA's performance analysis (PERFAN)

A method developed by BARRA, a consulting firm in
Berkeley, Calif. It is commonly used by institutional investors applying performance attribution analysis to
evaluate their money managers' performances.

Beta (Mutual Funds)

The measure of a fund's or stocks risk in relation to the market. A beta of 0.7 means
the fund's total return is likely to move up or down 70% of the market change; 1.3 means total return is likely
to move up or down 30% more than the market. beta is referred to as an index of the systematic risk due to
general market conditions that cannot be diversified away.

Beta equation (Mutual Funds)

The beta of a fund is determined as follows:
[(n) (sum of (xy)) ]-[ (sum of x) (sum of y)]
[(n) (sum of (xx)) ]-[ (sum of x) (sum of x)]
where: n = # of observations (36 months)
x = rate of return for the S&P 500 Index
y = rate of return for the fund

Beta equation (Stocks)

The beta of a stock is determined as follows:
[(n) (sum of (xy)) ]-[(sum of x) (sum of y)]
[(n) (sum of (xx)) ]-[(sum of x) (sum of x)]
where: n = # of observations (24-60 months)
x = rate of return for the S&P 500 Index
y = rate of return for the stock

Break-even analysis

An analysis of the level of sales at which a project would make zero profit.

Cluster analysis

A statistical technique that identifies clusters of stocks whose returns are highly correlated
within each cluster and relatively uncorrelated between clusters. Cluster analysis has identified groupings
such as growth, cyclical, stable and energy stocks.

Common-base-year analysis

The representing of accounting information over multiple years as percentages
of amounts in an initial year.
Common-size analysis The representing of balance sheet items as percentages of assets and of income
statement items as percentages of sales.

Comparative credit analysis

A method of analysis in which a firm is compared to others that have a desired
target debt rating in order to infer an appropriate financial ratio target.

Country beta

Covariance of a national economy's rate of return and the rate of return the world economy
divided by the variance of the world economy.

Credit analysis

The process of analyzing information on companies and bond issues in order to estimate the
ability of the issuer to live up to its future contractual obligations. Related: default risk

Discriminant analysis

A statistical process that links the probability of default to a specified set of financial ratios.

Expected return-beta relationship

Implication of the CAPM that security risk premiums will be
proportional to beta.

Factor analysis

A statistical procedure that seeks to explain a certain phenomenon, such as the return on a
common stock, in terms of the behavior of a set of predictive factors.

Foreign market beta

A measure of foreign market risk that is derived from the capital asset pricing model.

Horizon analysis

An analysis of returns using total return to assess performance over some investment horizon.

Horizontal analysis

The process of dividing each expense item of a given year by the same expense item in
the base year. This allows for the exploration of changes in the relative importance of expense items over time
and the behavior of expense items as sales change.

Leveraged beta

The beta of a leveraged required return; that is, the beta as adjusted for the degree of
leverage in the firm's capital structure.

Mean-variance analysis

Evaluation of risky prospects based on the expected value and variance of possible outcomes.

Multiple-discriminant analysis (MDA)

Statistical technique for distinguishing between two groups on the
basis of their observed characteristics.

Performance attribution analysis

The decomposition of a money manager's performance results to explain
the reasons why those results were achieved. This analysis seeks to answer the following questions: (1) What
were the major sources of added value? (2) Was short-term factor timing statistically significant? (3) Was
market timing statistically significant? And (4), Was security selection statistically significant?

Pro forma capital structure analysis

A method of analyzing the impact of alternative capital structure
choices on a firm's credit statistics and reported financial results, especially to determine whether the firm will
be able to use projected tax shield benefits fully.

Regression analysis

A statistical technique that can be used to estimate relationships between variables.

Scenario analysis

The use of horizon analysis to project bond total returns under different reinvestment rates
and future market yields.

Sensitivity analysis

analysis of the effect on a project's profitability due to changes in sales, cost, and so on.

Technical analysis

Security analysis that seeks to detect and interpret patterns in past security prices.

Unleveraged beta

The beta of an unleveraged required return (i.e. no debt) on an investment when the
investment is financed entirely by equity.

Vertical analysis

The process of dividing each expense item in the income statement of a given year by net
sales to identify expense items that rise faster or slower than a change in sales.

Zero-beta portfolio

A portfolio constructed to represent the risk-free asset, that is, having a beta of zero.

VERTICAL ANALYSIS

A financial analysis technique that relates key amounts on the income statement and balance sheet to a 100 percent or base figure for the present and previous year.
It shows the percentage change from last year to this year, making it easier to spot problems that require analysis.

Cost–volume–profit analysis (CVP)

A method for understanding the relationship between revenue, cost and sales volume.

Ratio analysis

A method of analysing financial reports to interpret trends and make comparisons by using ratios – two numbers, with one generally expressed as a percentage of the other.

Sensitivity analysis

An approach to understanding how changes in one variable of cost–volume–profit analysis are affected by changes in the other variables.

Variance analysis

A method of budgetary control that compares actual performance against plan, investigates the causes of the variance and takes corrective action to ensure that targets are achieved.

Ratio analysis

A method of relating numbers from the various financial statements to one another in order to get meaningful information for comparison.

capital investment analysis

Refers to various techniques and procedures
used to determine or to analyze future returns from an investment
of capital in order to evaluate the capital recovery pattern and the
periodic earnings from the investment. The two basic tools for capital
investment analysis are (1) spreadsheet models (which I strongly prefer)
and (2) mathematical equations for calculating the present value or
internal rate of return of an investment. Mathematical methods suffer
from a lack of information that the decision maker ought to consider. A
spreadsheet model supplies all the needed information and has other
advantages as well.

Beta

A measure of the riskiness of a specific security compared to the
riskiness of the market as a whole; measure of the systematic risk
of a security or a portfolio of securities

Ratio Analysis

The process of using financial ratios, calculated from key accounts
found in a company's financial statements, to make judgements
concerning the finances and operations of the firm

activity analysis

the process of detailing the various repetitive actions that are performed in making a product or
providing a service, classifying them as value-added and
non-value-added, and devising ways of minimizing or eliminating
non-value-added activities

correlation analysis

an analytical technique that uses statistical
measures of dispersion to reveal the strength of the
relationship between variables

cost-benefit analysis the analytical process of comparing the

relative costs and benefits that result from a specific course
of action (such as providing information or investing in a
project)

cost driver analysis

the process of investigating, quantifying,
and explaining the relationships of cost drivers and
their related costs

incremental analysis

a process of evaluating changes that
focuses only on the factors that differ from one course of
action or decision to another

least squares regression analysis

a statistical technique that investigates the association between dependent and independent variables; it determines the line of "best fit" for a set of observations by minimizing the sum of the squares
of the vertical deviations between actual points and the
regression line; it can be used to determine the fixed and
variable portions of a mixed cost

Pareto analysis

a method of ranking the causes of variation
in a process according to the impact on an objective
Pareto inventory analysis an analysis that separates inventory
into three groups based on annual cost-to-volume usage

sensitivity analysis

a process of determining the amount of change that must occur in a variable before a different decision would be made

variance analysis

the process of categorizing the nature (favorable or unfavorable) of the differences between standard and actual costs and determining the reasons for those differences

Beta

The price volatility of a financial instrument relative to the price
volatility of a market or index as a whole. beta is most commonly used with
respect to equities. A high-beta instrument is riskier than a low-beta
instrument.

Regression analysis

Statistical analysis techniques that quantify the
relationship between two or more variables. The intent is quantitative
prediction or forecasting, particularly using a small population to forecast the
behavior of a large population.

Pareto analysis

The 80:20 ratio that states that 20% of the variables included in an
analysis are responsible for 80% of the results. For example, 20% of all customers
are responsible for 80% of all customer service activity, or 20% of all inventory
items comprise 80% of the inventory value.

beta

Sensitivity of a stock’s return to the return on the market
portfolio.

break-even analysis

analysis of the level of sales at which the company breaks even.

credit analysis

Procedure to determine the likelihood a customer will pay its bills.

scenario analysis

Project analysis given a particular combination of assumptions.

sensitivity analysis

analysis of the effects of changes in sales, costs, and so on, on project profitability.

simulation analysis

Estimation of the probabilities of different possible outcomes, e.g., from an investment project.

Cost-Benefit Analysis

The calculation and comparison of the costs and benefits of a policy or project.

Failure analysis

The examination of failure incidents to identify components
with poor performance profiles.

Beta coefficient

A measurement of the extent to which the returns on a given stock move with stock market.

Beta risk

Risk of a firm measured from the standpoint of an investor who holds a highly diversified portfolio.

Break-Even Analysis

An analytical technique for studying the relationships between fixed cost, variable cost, and profits. A breakeven chart graphically depicts the nature of breakeven analysis. The breakeven point represents the volume of sales at which total costs equal total revenues (that is, profits equal zero).

Financial Trend Analysis

Process of analyzing financial statements of a company for any continuing relationship.

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