EDU Articles
Popular articles
What are Risk-Weighted Assets?
International banking regulations set forth in the Basel Accords require that institutions maintain a certain amount of capital relative to the amount of risk-weighted assets (RWA) they have. Conservative investments such a treasury notes have a risk weighting of zero, while corporate bonds have a weighting of .20, and so forth. The exact weighting system is laid out in Basel agreements. The system is designed to reveal a bank’s level of exposure to potential losses, and the capital requirements are there to balance out the risks and to protect the global economy from a meltdown in the financial system. Continue reading...
What is Tier 1 Capital?
Tier 1 Capital are the core asset holdings of a bank. They are disclosed, liquid, risk-averse assets, and are used by regulators to evaluate a bank's compliance with capital requirements. Banks lend out about as much money as they can in general. They must have capital on hand to absorb losses and remain solvent. The Basel Accord is an international agreement dealing with capital reserve requirements for banks, enacted after the meltdown of 2008. Continue reading...
What is the Capitalization Ratio?
The capitalization ratio measures a company’s leverage, or the amount of long-term debt it holds relative to long-term debt + shareholder equity. Essentially, it is a measure of how capitalized a company is to support operations and growth. Continue reading...
What is the Debt to Capital Ratio?
The debt-to-capital ratio is a measure of a company’s leverage that looks at total debt compared to total capital (shareholder equity + debt). This measure of leverage is not a globally accepted accounting practice, therefore it is important for analysts to learn exactly what is being included by the company as their debt and equity in calculating the ratio. Generally speaking, a higher debt to capital ratio indicates that the company is financing more of its operations and needs through the debt markets versus with equity. Comparing debt-to-capital ratios amongst companies within the same sector or industry can be a useful exercise. Continue reading...
What is Weighted Average Market Capitalization?
Indexes track markets in different ways, and Weighted Average Market Capitalization is a method which gives market cap, or the cumulative value of outstanding shares for a company, greater weight. Market Capitalization is the sum total value of all outstanding shares and is one way to judge the size of a company or at least its size in the market. Indexes such as the S&P 500 are Cap-Weighted indexes, which means they give greater emphasis the to the largest companies, and the dramatic price movements of only a few of the largest companies would mean that the index would swing disproportionately for large-cap companies. Continue reading...
What is Sharpe Ratio?
The Sharpe Ratio is a risk-weighted metric for returns on investment. It measures whether an investment offers a good return for the amount of risk assumed by the investor. The risk/return trade-off is a positive linear relationship in most theoretical depictions – if an investor seeks greater returns, they will have to take on greater risk. For more stability and less risk, an investor will have to sacrifice some potential returns. Continue reading...
What is alpha in investing?
Alpha is a risk ratio which measures gains or losses relative to a benchmark, indicating whether an investor is being compensated with a return greater than the volatility risk being taken. Alpha’s counterpart, the Beta figure, measures how closely an investment follows movements in the market as a whole or, when examining mutual funds, how similarly the funds move to their relevant indexes. Alpha is expressed as integers, which can be translated into percentage points above or below a benchmark for a time period. Investors are interested in higher Alpha figures: the larger the positive Alpha, the more the fund in question has outperformed its benchmark. An Alpha of 2 indicates a performance 2% greater than its benchmark; inversely, a -2 Alpha would denote 2% underperformance. Continue reading...
What Does it Mean to Deleverage?
When a company “deleverages,” it means it is attempting to shrink the amount of debt on its books relative to its assets. In some cases the act of deleveraging requires a company to sell-off/liquidate key assets in order to pay down debt, which ultimately means downsizing as well. A company may choose to deleverage as a strategic tactic, but often times they are forced to as a result of economic circumstances. Continue reading...
What is Weighted Average?
A weighted average is a calculation considers the relative importance or relevance of a piece of data. Weighted averages multiply numbers in the average by a predetermined factor, like time, that enhances the relevance given to the number. One example of a weighted average is the Exponential Moving Average (EMA), an alternative to the Simple Moving Average (SMA) line which gives greater weight to the more recent data. SMAs are effective in their simplicity, but their efficacy is most closely tied to how they are used. Continue reading...
What is the 'Fixed Assets to Net Worth' Ratio?
The fixed assets to net worth ratio is a calculation intended to measure the solvency of a company. It generally tells the analyst what percentage of a company’s assets are cash vs. fixed assets. To calculate the ratio, you divide net fixed assets into net worth. A fixed assets to net worth ratio greater than 0.75, generally, means that a company has too much of their net worth tied up in assets like equipment, machinery, land, and so on. Continue reading...
What are Solvency Ratios?
Solvency ratios come in several flavors, but they all seek to shed light on a company’s ability to pay its long-term debt obligations. There are several types of what is known as solvency ratios. Some examples of solvency ratios include debt-to-equity, debt-to-assets, interest-coverage ratio, the quick ratio, the current ratio, and so forth. These are meant to be metrics for a company’s ability to meet its debt obligations through various market conditions. The quick ratio, for instance, can reveal whether the current-year liabilities (payables) of a company are covered by the current year cash and receivables, or whether the company will depend on other sources such as inventory liquidation to meet this need. Continue reading...
What is Cost of Capital?
The Cost of Capital is the hurdle over which a business must get to generate positive cash flow. It is what it will cost companies to get capital from investors. Companies sometimes use debts or equities to finance their business operations. The service paid on debt and the operating expenses are lines over which the revenue must get to be saved as retained earnings or distributed as dividends. The yield expected by investors on debt is the cost of capital for the company taking on those loans. Continue reading...
What is the 'Non-Current Assets to Net Worth' Ratio?
The non-current assets to net worth ratio will give the analyst an idea of how much of a company’s value is tied-up in non-current assets. As a quick refresher, ‘non-current assets’ are those that most likely will not convert to cash within a year’s time, also known as a long-term asset. Where a company’s non-current asset to net worth ratio lies depends on the industry, but generally speaking a company wants to avoid having that ratio rise above 1 to 1.5. That means the company is highly illiquid, and could be vulnerable in the event of an economic shock. Continue reading...
What is Mutual Fund Classification According to the Price to Earnings Ratio?
Managing a fund based on P/E Ratio generally tends to put valuation ahead of other criteria when selecting stocks. The main categories which can be derived from P/E Ratios are Growth and Value funds. Fund managers may intentionally invest in companies with a higher P/E than the market benchmark, because these tend to be considered Growth stocks. These companies are experiencing growth and are projected to continue to do so, which is seen in the high price of the stocks. Continue reading...
What is the right mix of assets for me?
Arriving at the appropriate asset allocation is not very easy to do by guesswork, so we’re here to help. There is no such thing as a mix of assets that is right for everyone. It depends on your age, employment situation, the size of your investment portfolio, your objectives, time horizon, risk tolerance, income requirement from your investment portfolio, tax bracket, and many other factors. Programs and algorithms can help you significantly when you plug some of these variables in, but it is still wise to apply some scrutiny and a human touch. Continue reading...
What is a price-weighted index?
When creating an index, it must be decided what criteria will affect the value of the index, and in the case of a price-weighted index, the only consideration is the price of shares. A price-weighted index is created by adding up the individual price per share of the companies included in the index and dividing by the number of companies. Essentially what you've done is arrived at the average price per share of the companies included in the index. Continue reading...
What is Volume Weighted Average Price (VWAP)?
The Volume Weighted Average Price (VWAP) helps traders consider the influence of volume on prices. VWAP is calculated by taking the average of prices from a time period and dividing it by the trading volume for the current day. Traders use VWAP to confirm trends and decide whether to take long or short positions, while large institutions are likely to use VWAP to avoid disrupting market prices, finding the liquid and illiquid price points and trading so as not to move prices away from the averages. Continue reading...
What is beta in investing?
Beta is a volatility indicator that denotes how closely an investment follows movements in the market as a whole; when examining mutual funds, it indicates how similarly the funds move to their relevant indexes. It is often referenced with its counterpart, Alpha; a risk ratio which measures gains or losses relative to a benchmark, indicating whether an investor is being compensated with a return greater than the volatility risk being taken. Continue reading...
What is Risk?
Risk can be defined as exposure to the possibility of loss of an asset. Risk might be used to denote the cause of the potential loss, or the probability of the loss. In finance, it is common to hear about the correlation between risk and return; more risk may yield a higher return, but it also has the potential for more loss. The situation requires that an investor willing to take such a risk must provide the capital to fund the investment which may grow or may fail. Continue reading...
What Is Market Capitalization?
Market capitalization is a measure of a company’s size, in terms of the value of its total outstanding shares. Most readers have probably heard of large-cap, mid-cap, and small-cap stocks. These classifications are based on the market capitalization of a company, which is defined as the number of a company's outstanding shares multiplied by the price of one share. For example, if company ABC issued 1,000 shares and it is trading at $10/share, then the market capitalization of company ABC is 1,000 x 10 = $10,000. The largest company by market capitalization as of the time of this writing is Apple Inc. Its market capitalization exceeds $750 billion. Continue reading...