A state of nature is a precise and detailed definition of an economic result that specifies the realized values of all economically relevant variables.

Planned amortization class (PAC) tranches receive principal payments in a more complex manner than do sequentialpay CMOs.

Since the riskless bond is worth $27 million, the put option must be worth $2 million

If the approximation formula, the risk-neutral probability of default would be 5%, found as 0.01/0.20.

Balance sheet CDOs are created to assist a financial institution in divesting assets from its balance sheet but Arbitrage CDOs are created to attempt to exploit perceived opportunities through money management to earn superior profits.

Since the bank must take a one-for-one regulatory capital charge ($10 million) for this first-loss position, only $22 million ($32 million – $10 million) of regulatory capital is freed by the CDO trust

Venture capital securities are private stocks or equity-linked securities obtained by venture capital when investing in business ventures that seek to expand and become public.

Junk bonds are high-risk debt instruments, also called high-yield, non-investment or speculative-grade debt.

Mezzanine debt is often seen as a form of private equity, owing to its high risk and often involving potential equity participation.

Venture capital fund is a private equity fund that pools big, sophisticated investors’ resources to finance new and start-ups.

In escrow agreement, Until the entire fund is liquidated, the portion of the incentive fees of the manager is held in a separate account.

The three volatility amounts to approximately $8 million, $16 million and $24 million.

Relative return product is an investment with a return that is largely driven by broad market returns and should therefore be assessed on the basis of how the return on the investment is compared with broad market returns.

Counterparty risk is the uncertainty associated with one party’s economic outcomes in a contract due to a possible failure of the other side of the contract to fulfill its obligations, presumably due to insolvency or illiquidity.

An activist investment strategy often involves (1) identifying companies whose management does not maximize shareholder wealth; (2) setting up investment positions that can benefit from particular changes in corporate governance, such as replacing existing management ; and (3) execution of the corporate governance changes that are perceived to benefit the investment positions that have been established.

The size of the short position is $1,250,000.

Nonactive bets are positions held to reduce tracking errors and not to serve as active bets that improve returns.

If the moneyness of the option grows substantially higher by increments of, say, $200, then the option’s intrinsic value will rise to $300. But if the moneyness falls by the same amount ($200), the option’s intrinsic value will not fall to –$100; it can only fall to $0

The expected spot price can not be observed; we can only estimate it, and those estimates can vary between market participants.

If commodity prices and inflation increase, the decrease in the overall market P / E ratios may likely lead to a fall in the commodity-producing firm’s P / E ratio.

A master limited partnership or publicly traded partnership is a publicly-traded entity taxed as a partnership. It combines the tax benefits of a partnership with the liquidity of publicly traded securities. MLP structures don’t have to pay income taxes themselves.

Opportunistic real estate is expected to derive most or all of its returns from the appreciation of the property and can show significant volatility in value and returns.

Default risk is a dispersal of economic results due to a borrower’s actual or potential failure to make scheduled payments.

Leveraged buyouts (LBOs) refer to those transactions in which a publicly-traded company’s equity is bought using a small amount of investment capital and a large amount of loaned funds to take over the private business.

Hedge funds(investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio construction and risk management techniques to improve performance, such as short selling, leverage, and derivatives) are less limited, frequently have different payout systems and often have highly aggressive and complex approaches or mechanisms for trading.

Passive investing’s goal is to build wealth gradually. Also known as a buy-and-hold strategy, passive investing means buying a security to own it long-term. Passive investment tends to focus on purchasing and holding securities in an effort to match a target’s risk and return, like a highly diversified index

SMAs are financial products that are sold via a Product Disclosure Statement (PDS) and operate within a Managed Investment Scheme. To promote secrecy, a fund is always opaque for its creditors; an SMA gives its creditors clarity.

The beta is defined as the covariance of the return on the assets with the return on the market portfolio, divided by the variance in market portfolio returns

Model Misspecification is where the model you made with regression analysis is in error. In other words, it doesn’t account for everything it should. Models that are misspecified can have biased coefficients and error terms, and tend to have biased parameter estimations and there are three types of model misspecification.

Equity risk premium refers to the excess return that investing in the stock market provides over a risk-free rate. The equity risk premium (ERP) is the predicted stock-market return Exceeds the risk-free rate.