Definition of Microeconomics

Microeconomics

The study of firm and individual decisions insofar as they affect the allocation and distribution of goods and services.

Affirmative covenant

A bond covenant that specifies certain actions the firm must take.

Asset allocation decision

The decision regarding how an institution's funds should be distributed among the
major classes of assets in which it may invest.

Capital allocation

decision allocation of invested funds between risk-free assets versus the risky portfolio.

Concentration services

Movement of cash from different lockbox locations into a single concentration
account from which disbursements and investments are made.

Confirmation

he written statement that follows any "trade" in the securities markets. Confirmation is issued
immediately after a trade is executed. It spells out settlement date, terms, commission, etc.

Cumulative probability distribution

A function that shows the probability that the random variable will
attain a value less than or equal to each value that the random variable can take on.

Distributions

Payments from fund or corporate cash flow. May include dividends from earnings, capital
gains from sale of portfolio holdings and return of capital. Fund distributions can be made by check or by
investing in additional shares. Funds are required to distribute capital gains (if any) to shareholders at least
once per year. Some Corporations offer Dividend Reinvestment Plans (DRP).

Dynamic asset allocation

An asset allocation strategy in which the asset mix is mechanistically shifted in
response to -changing market conditions, as in a portfolio insurance strategy, for example.

Event study

A statistical study that examines how the release of information affects prices at a particular time.

Financing decisions

decisions concerning the liabilities and stockholders' equity side of the firm's balance
sheet, such as the decision to issue bonds.

Firm

Refers to an order to buy or sell that can be executed without confirmation for some fixed period. Also,
a synonym for company.

Firm commitment underwriting

An undewriting in which an investment banking firm commits to buy the
entire issue and assumes all financial responsibility for any unsold shares.

Firm's net value of debt

Total firm value minus total firm debt.

Firm-specific risk

See:diversifiable risk or unsystematic risk.

Frequency distribution

The organization of data to show how often certain values or ranges of values occur.

Information services

Organizations that furnish investment and other types of information, such as
information that helps a firm monitor its cash position.

Intrinsic value of a firm

The present value of a firm's expected future net cash flows discounted by the
required rate of return.

Investment decisions

decisions concerning the asset side of a firm's balance sheet, such as the decision to
offer a new product.

Lognormal distribution

A distribution where the logarithm of the variable follows a normal distribution.
Lognormal distributions are used to describe returns calculated over periods of a year or more.

Managerial decisions

decisions concerning the operation of the firm, such as the choice of firm size, firm
growth rates, and employee compensation.

Mutually exclusive investment decisions

Investment decisions in which the acceptance of a project
precludes the acceptance of one or more alternative projects.

Neglected firm effect

The tendency of firms that are neglected by security analysts to outperform firms that
are the subject of considerable attention.

Non-financial services

Include such things as freight, insurance, passenger services, and travel.

Normal probability distribution

A probability distribution for a continuous random variable that is forms a
symmetrical bell-shaped curve around the mean.

Policy asset allocation

A long-term asset allocation method, in which the investor seeks to assess an
appropriate long-term "normal" asset mix that represents an ideal blend of controlled risk and enhanced
return.

Probability distribution

Also called a probability function, a function that describes all the values that the random variable can
take and the probability associated with each.

Retail investors, individual investors

Small investors who commit capital for their personal account.

Short-term investment services

services that assist firms in making short-term investments.

Skewed distribution

Probability distribution in which an unequal number of observations lie below and
above the mean.

Small-firm effect

The tendency of small firms (in terms of total market capitalization) to outperform the
stock market (consisting of both large and small firms).

Standardized normal distribution

A normal distribution with a mean of 0 and a standard deviation of 1.

Tactical Asset Allocation (TAA)

An asset allocation strategy that allows active departures from the normal
asset mix based upon rigorous objective measures of value. Often called active management. It involves
forecasting asset returns, volatilities and correlations. The forecasted variables may be functions of
fundamental variables, economic variables or even technical variables.

Target firm

A firm that is the object of a takeover by another firm.

Cost of goods sold

The cost of merchandise that a company sold this year. For manufacturing companies, the cost of raw
materials, components, labor and other things that went into producing an item.

Allocation base A measure of activity or volume such as labour

hours, machine hours or volume of production
used to apportion overheads to products and
services.

Cost of goods sold

See cost of sales.

Overhead allocation

The process of spreading production overhead equitably over the volume of production of goods or services.

Cost of goods sold

The cost of the items that were sold during the current period.

Probability Distribution

A list of all possible outcomes and the chance of each outcome
occurring

allocation

the systematic assignment of an amount to a recipient
set of categories annuity a series of equal cash flows (either positive or negative) per period

approximated net realizable value at split-off allocation

a method of allocating joint cost to joint products using a
simulated net realizable value at the split-off point; approximated
value is computed as final sales price minus
incremental separate costs

cost allocation

the assignment, using some reasonable basis,
of any indirect cost to one or more cost objects

cost of goods manufactured (CGM)

the total cost of the
goods completed and transferred to Finished goods Inventory
during the period

distribution cost

a cost incurred to warehouse, transport, or deliver a product or service

net realizable value at split-off allocation

a method of allocating joint cost to joint products that uses, as the proration base, sales value at split-off minus all costs necessary
to prepare and dispose of the products; it requires
that all joint products be salable at the split-off point

physical measurement allocation

a method of allocating a joint cost to products that uses a common physical characteristic as the proration base

probability distribution

a range of possible values for which each value has an assigned likelihood of occurrence

sales value at split-off allocation

a method of assigning joint cost to joint products that uses the relative sales values of the products at the split-off point as the proration basis; use of this method requires that all joint products
are salable at the split-off point

Normal (bell-shaped) distribution

In statistics, a theoretical frequency
distribution for a set of variable data, usually represented by a bell-shaped
curve symmetrical about the mean.

Allocation

The process of storing costs in one account and shifting them to other
accounts, based on some relevant measure of activity.

Cost of goods sold

The accumulated total of all costs used to create a product or service,
which is then sold. These costs fall into the general sub-categories of direct
labor, materials, and overhead.

Finished goods inventory

goods that have been completed by the manufacturing
process, or purchased in a complete form, but which have not yet been sold to
customers.

Individual Retirement Account

A personal savings account into which a defined
maximum amount may be contributed, and for which any resulting interest
is tax deferred.

Individual Retirement Annuity

An IRA comprised of an annuity that is managed
through and paid out by a life insurance company.

Uniformed Services Employment and Reemployment Rights Act of 1994

A federal act that minimizes the impact on people serving in the Armed Forces
when they return to civilian employment by avoiding discrimination and increasing
their employment opportunities.

Realizable Revenue A revenue transaction where assets received in exchange for goods and

services are readily convertible into known amounts of cash or claims to cash.

Cost of goods sold

The charge to expense of the direct materials, direct labor, and
allocated overhead costs associated with products sold during a defined accounting
period.

Distribution center

A branch warehouse containing finished goods and service
items intended for distribution directly to customers.

Distribution inventory

Inventory intended for shipment to customers, usually
comprised of finished goods and service items.

Finished goods inventory

Completed inventory items ready for shipment to
customers.

Individual Insurance

Insurance that is offered to individuals rather than groups.

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