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Also known as Structured Finance, securitization refers to the combination or pooling of cash flows from various underlying collateral (such as mortgages, credit cards, home equity loans, commercial mortgages, bank loans), then repackaging these cash flows to create securities that are then sold to investors.

SML shows the relationship between the expected returns and market risk. According to SML, at equilibrium, the return on a security is equal to the risk free return plus the excess return (over the risk free return) on the market portfolio times the beta of the security.

The process of measuring the relative investment attractiveness of one sector as compared to another. Various valuation techniques are employed to infer the relative attractiveness of the sectors. The valuation techniques depend on the way the sector is defined, for example, industry sector or yield-curve segment or credit class. Sector…

Market where participants buy and sell securities directly with one another without dealing with the issuing company.

A seasoned pool of mortgages is one that is outstanding for a while, generally more than 30 months, and experiences faster prepayment levels. This can be due to increased housing turnover coming from homeowners relocating due to trading up, realizing equity gains in real estate value, improved financial situation, etc.

Any swap in which the notional principal increases for a time and then amortizes to zero over the remainder of its tenor.

Investors or lenders undertake risk while making an investment or lending money to borrowers. A risk premium is the additional rate expected or charged over and above the risk free rate in order to compensate them for accepting or undertaking the risk. The risk premium is expected or charged for…

The return on a risk free asset. This is the guaranteed rate of return earned, when the money is invested in a security with no risk of losing capital and facing no uncertainty in realizing the returns.

See Capital Ratio.

The amount of capital required to be held to absorb unexpected losses when taking into account the riskiness of assets/businesses in order to protect customers, depositors and investors.

The return on an investment after taking into account the revenue and cost, both external and internal, divided by the amount of capital that is first adjusted for the riskiness of the investment. Technically speaking, it is the risk-adjusted return divided by the risk-adjusted capital.

A measure of uncertainty. Risk measures the extent of uncertainty attached to the realization of the expected return on any asset. It is generally measured through the standard deviation of returns.