Glossary of Terms

Glossary of Terms

The acronyms used in Chapter 3 of this thesis have been made up as follows; the first two letters define the country of origin; United States or United Kingdom. The next letter dictates its frequency; Quarterly or Monthly. Together these three letters indicate the source of the data series; USQ (National Council of Real Estate Investment Fiduciaries), UKQ (Jones Lang Wootton) and UKM (Investment Property Databank). The type of returns series is given by the next letter; Total return or Capital return. Finally the sector is represented by the last letter: in the UK - all Property, Retail, Office and Industrial; in the US - all Property, Retail, Office, research and Development /office and Warehouse.


The highest credit rating given by the two main rating agencies in the US, Standard & Poor's and Moody's (Note that DDD is the lowest).

Active management

A form of fund management that involves buying and selling assets with the objective of earning positive above average returns.

Adverse selection

A problem in pricing insurance, in that persons with above-average risk are more likely to purchase insurance than those with below-average risk.


The difference between an equity's expected return and its equilibrium expected return.


An empirical regularity that is not predicted by any known asset pricing model.

Approved list

A list of investments that an investment organisation deems worthy of accumulation in a given portfolio. For an organisation that uses an approved list, typically any investment on the list may be purchased by its fund managers without additional authorisation.


The simultaneous purchase and sale of the same, or similar, security, in two different markets for advantageously different prices.

Arbitrage portfolio

A portfolio that requires no investment, has no sensitivity to any factor, and has a positive expected return. Strictly, a portfolio that provides inflows in some circumstances and requires no outflows under any circumstances.

Arbitrage Pricing Theory, or APT

An equilibrium model of asset pricing, which states that the expected return on a security is a linear function of the security's sensitivity to various common factors.


Autoregressive conditional heteroscedasticity.


Autoregressive integrated moving average.


Autoregressive moving average.

Asset Allocation

The process of determining the optimal division of a portfolio among available asset classes.


All banks in the United Kingdom which contribute to the banking sector.These are London clearing banks, Scottish clearing banks, Northern Ireland banks other British banks, accepting houses and the UK branches and subsidiaries of foreign banks.


The US-based fund performance evaluation service founded by Mr.Barr Rosenberg.


One-hundredth of one percent.


A speculator who acts, e. g. sells equities, on an expectation of falling prices, or a person who expects prices to fall.

Bear market

A market in which investment prices are falling.

Beta coefficient (β)

A relative measure of the sensitivity of an asset's return to changes in the return on the market portfolio. Mathematically, the 0 coefficient of a security is the security's covariance with the market portfolio, divided by the variance of the market portfolio.


Interest bearing (or deeply discounted) debt security. Also an investment unit backing a unit-linked life assurance contract.


A speculator who acts e. g. buys equities on the expectation of rising prices, or a person who expects prices to rise.

Bull market

A market in which investment prices are rising.

Business rates

A tax charged on commercial real estate in the UK.

Callable Bond

The right of an issuer of securities to repay before maturity, at a given price during a specified period.

Capital Asset Pricing Model

or CAPM. An equilibrium model of asset pricing which states that the expected return on a security is a positive linear function of the security's sensitivity to changes in the market portfolio return.


Combined Actuarial Performance Services.

Central moments

Similar to moments except that the first moment, µ, is subtracted from the random variable. Alternatively,moments about the mean.


Capital gains tax. A UK tax levied when, in real terms, investment gains are realized.

Closed-end fund

or closed-end investment company.The US near-equivalent of an investment trust in the UK. A managed investment company with an infinite life, which does not stand ready to repurchase its own shares from its owners, and rarely issues new shares beyond its initial offering.

Capital Market Line, or CML

Capital Market Line. The set of portfolios obtainable by combining the market portfolio with risk-free borrowing or lending. Assuming homogeneous expectations and perfect markets, the CML represents the efficient set.


Real estate or securities that may be pledged by a borrower, normally as security for the repayment of a loan or overdraft.

Contingent immunisation

A form of bond management that entails both passive and active elements. Under contingent immunisation, a bond portfolio is actively managed as along as acceptable results are obtained. However, if unacceptable results occur, the portfolio is immediately immunised.


A financial instrument which gives the holder an option to convert into another type, usually equity.


is a measure of the strength of (linear) association between two or more variables.

Correlation coefficient

A statistical measure similar to covariance (see below), in that it measures the degree of mutual variation between two random variables. The correlation coefficient rescales covariance to facilitate comparison among pairs of random variables. The correlation coefficient is bounded by the values -1 and +1, and is defined as follows:

Corporation Tax

The UK tax on UK company profits


A statistical measure of the relationship (the extent of mutual variation) between two random variables.


The nominal rate of interest paid on a fixed interest security, generally annually or biannually, occasionally quarterly. It is used colloquially in the US to refer to a US Treasury note or bond.


The undertakings contained in a lease which govern the relationship between lessor and lessee. They are usually restrictive in nature, and therefore affect the value of the property or real estate to which they relate.


Centre for Research in Security Prices. Based in the US.

Day-of-the-week effect

An empirical regularity whereby returns appear to be lower on Mondays than on other days of the (trading) week. Also known as the Weekend effect.


Discounted Cash flow.


A corporate fixed interest bond.

Discount rate

The rate of interest which reduces the sum of an investment's future income flow to its present value or price.


The process of adding securities to a portfolio in order to reduce its unique risk and, thereby, its total risk.


The cash payments made to shareholders by a company.

Dividend yield

The (current) annual dividend per share, grossed up for tax and often expressed as a percentage of the share price.


The partial moment from -∞ to an arbitrary point, often at arget rate-of-return. To paraphrase,the squared negative deviations from some chosen point of reference. If this point of reference is the mean value, then downside-variance is equivalent to semi-variance.


Downside risk tolerance.


A measure of the average maturity of the stream of payments generated by a financial asset. Mathematically, duration is the weighted average of the lengths of time until the asset's remaining payments are made. The weights in this calculation are the proportion of the aset's total present value represented by the present value of the respective cash flows.


The net profits of a company available for distribution to ordinary shareholders.


European Community.

Efficient market

A market in which prices fully reflect information affecting the worth of investments.

Efficient Markets Hypothesis

A theory which states that financial markets are efficient, in that the prices in the market reflect and embody all the information that is currently available. A logical consequence of this hypothesis is that no trader or fund manager should be able to make consistently abnormal profits in a financial market.

Efficient Set, or Frontier

The set of efficient portfolios which offer invetirs both the naximum expected return for varying levels of risk (as measured by variance), and minimum risk for varying levels of expected return.

Equiated yield

The internal rate-of return − or total return p.a. − from an investment.


Rerfers to either the number of ordinary shares issued by companies; or ordinary shares.

Equivalent yield

The total annual return (internal rate-of-return) to be received from a reversionary real estate investment over the period to reversion, assuming no change in the property's rental value or market yield.

Exchange rate risk

The uncertainty in the return on a foreign financial asset due, to the unpredictability of the rate at which the foreign can be exchanged into the investor’s own currency.

Excess return

The difference between the return on a security and the return on the risk-free asset.


For a random variable, the expectation is the probability weighted average outcome.

Financial market

A mechanism designed to facilitate the exchange of financial assets by bringing buyers and sellers of security Market.

Floating rate

An interest rate which is reset at regular intervals − the adjustment usually being made with reference to a key rate such as the London inter-bank offered rate.


The highest form of land ownership under the Crown in the UK.


Full Repairing and Insuring. A lease under which the lessee is responsible for all repairs and insurance.


Generalised Autoregressive Conditional Heteroscedasticity.


The proportion of a company's long-term debt and preference share capital to its ordinary equity share capital. Known as leverage in the US. (Note that although the return to preference shareholders is a fixed interest rate, there is no legal obligation to pay it, hence the inclusion in net worth. However, when considering return to ordinary shareholders, it may then be appropriate to treat preference share dividends as a fixed charge. )


Gilt-edged securities. Bonds issued by the British government. The term is also used of bonds issued by Commonwealth governments, local authorities and public agencies in the United Kingdom.

Gross fund

An institution exempt from tax e.g. pension funds and charities.


The reduction of risk on exposure to changes in market prices/rates through taking an offsetting position.

Homogeneous expectations

Where investors possess the same perceptions of the expected returns, standard deviations and covariances of securities.


A bond portfolio fund management technique whereby an investor constructs a portfolio to meet a future stream of cash outflows with a high degree of certainty.

i. i. d.

Independently and identically distributed.


Uniform in time: having equal duration: recurring at regular intervals. (Collins Enlish Dictionary)

Income yield

An investment's annual income, often expressed as a percentage of the its price.

Index fund

An investment fund which is constructed to mimic the investment performance of a particular index, e.g. the FT-SE All-Share Index.

Inefficient portfolio

One which does not satisfy the criteria of an efficient portfolio and thus does not lie on the efficient set.

Index-linked gilts

Gilts in which the interest payments and redemption value are linked to the RPI.

Inflation hedge

An asset which preserves the value of its purchasing power over time despite changes in the price level.

Institutional grade real estate

In both the UK and US this term seems to be used as a woolly 'view' of the worth of a property to its owner. In the UK particularly, most weight is given to the strength of covenant of the tenant i.e. the possibility or otherwise of a tenant being able to meet the rent and/or staying in business throughout the remaining term of the lease. In this regard Government departments have `most favoured tenant' status. This term should not, indeed cannot, be confused with the rating of bonds which permits institutions to assessthe risk of investing in them.

Insurance companies

This term includes both life assurance and non-life/general insurance businesses in the UK. Lloyds's underwriters are not included in this category.

Interest rate risk

The uncertainty in the return on a fixed-income security caused by unanticipated fluctuations in the value of the asset owing to changes in interest rates.

Investment grade

Bonds that possess ratings permitting their purchase by the majority of institutional investors, particularly regulated financial institutions. Usually, investment grade bonds have ratings of at least BBB (S&P) or Baa (Moody's). See also `Junk'.

Investment trust

Companies quoted on the ISE that companies. They are `closed ended' with a fixed share capital, which can only be varied by shareholder consent via e. g. a rights issue. Investment trusts may hold practically any type of security, and can borrow money. Its share price is governed by supply and demand on the ISE – rather than its net asset value per share ("NAV") – and usually stands at a discount to NAV. In addition to dealing on the ISE, investors may conduct transactions with the company itself, usually at a lower, occasionally nil, commission rate. Annual management charges of UK investment trusts average between 0.3% and 0.75% p.a. Not to be confused with 'unit investment trusts' in the US (see below).


Investment Property Databank Limited.


Initial public offering.


Internal rate-of-return – an investment appraisal method which calculates the discount rate required in order to equate the present value of a future stream of net cash inflows (or outflows) with the initial investment. The method uses discounted cash flow and net present value techniques.


London International Stock Exchange.

January effect

An empirical regularity whereby returns appear to be higher in January than in other months of the year.


Jones Lang Wootton, chartered surveyors.

Junk bonds

Bonds that do not possess ratings permitting their purchase by the majority of institutional investors. Usually, junk bonds have ratings of, at most, BB (S&P) or Ba (Moody's). Also known as speculative grade bonds.


is the fourth moment of a random variable. Normal random variables have a kurtosis of three.


A tenant under a lease.


A person who grants a lease. The head lessor is a property's freeholder.


London inter-bank bid rate i.e. the rate of interest paid on deposits in the London inter-bank market.


London inter-bank offered rate. The rate of interest quoted by banks at which they are willing to lend funds for inter-bank loans and deposits. Rates are quoted on maturities ranging from overnight to five years. LIBOR is also used as a reference rate for setting (fixing) the rate on loans and e.g. floating rate instruments.


London International Financial Futures Exchange. Merge with the London Traded Options Market to form the London International Financial Futures and Options Exchange in 1992, but still referred to by its former acronym.


Likelihood Ratio Test


Lagrange Multiplier Test

Liquid assets

Assets which are, or quickly converted into, cash.

Market portfolio

A portfolio consisting of an investment in all securities of a particular market. The proportion invested in each security equals the percentage of the total market capitalisation represented by that security. (Note that the `true' market portfolio would be the aggregate of all assets of whatever type and wherever situate.)

Market risk

That which results from general trends in market prices and cannot be avoided by diversification; the risk of a total economic system.

Market yield

The rental yield of a property if let at its rental value; also known as the all-risk yield.


The practice of securing a distribution of assets which is equal to that of a liability, in respect of characteristics such as maturity or currency denomination.


The time to expiry of a security − normally a debt instrument. Original maturity is the time to expiry upon the issue of the loan.

Maturity ratio

The ratio of a pension funds 'current' expenses to income.


Minimum Lending Rate.


The expected value of a random variable (first moment), its squared value (second moment), its cubed value (third moment), & c.

Money Market

The market in short-term deposits.


An agreed postponement of the payment of interest or repayment of debt capital.


A loan secured on real estate.


The party which lends money by mortgage.


The party which borrows money by mortgaging an investment in real estate.




Modern Portfolio Theory.


Multi-period investment

Mutual fund

The US equivalent of a unit trust in the UK.

n. i. d.

Normally and identically distributed


The National Council of Real Estate Investment Fiduciaries, in the US.

Neglected Firm Effect

An empirical observation that companies followed by relatively few securities analysts have had abnormally high returns.


Net Present Value. The present value of future net cash flows discounted, using an appropriate interest rate, to take account of the time value of money.


The New York Stock Exchange.

Open-ended investment companies

In essence these are unit trusts, which can redeem or issue shares (not units) on investor demand. Unlike unit trusts, they are legally structured as companies quoted on a stock market where, being open-ended, the share price should reflect the value of the assets. The first in the UK is due to be launched in January, 1997; the continental equivalent of these was first issued in Luxembourg in the early 1980's, followed by France. Quotations there seem to have been 'single priced' with no bid-offer spread, and the manager's or market maker's turn obtained via a dealing commission. These should not be confused with 'open-ended mutual funds' (see below).

Open-ended mutual fund

The US equivalent of a UK unit trust. These should not be confused with `open-ended investment companies' (see above).


The right but not the obligation to buy (under a call option) or sell (under a put option) a commodity or financial instrument, in return for the payment of a premium for the option.


Recurrent expenses faced by an investor as an ordinary consequence of owning an investment e. g. for a real estate investor − repairs, insurance and management expenses.

Perfect market

A securities market in which no impediment to investing exists. Such impediments would include finite divisibility of securities, taxes, transaction costs, and the costs in price and/or time of information.


This is occasionally confused with basis point (see above). In US stock markets, a point equals one dollar.

Portfolio Performance Evaluation

The periodic analysis of a portfolio's performance in terms of both returns earned and risks incurred.


Generally used to describe a margin (paid) above the normal price level.


Property Income Certificates.

Primary asset

Those which are in positive net supply to the investing public i.e. they are part of the market portfolio (Dybvig & Ingersoll (Dybvig and Ingersoll Jnr., 1982)).

Primary market

A market for the issue of new securities.


The probability that some specific outcome of a process will occur. This can be interpreted as the relative frequency with which that outcome would be obtained if the process were repeated a large number of times under similar conditions.


This term denotes a single piece of real estate; in the UK, a particular or single building.

Property bond

An investment unit based on real estate, the performance of which determines the benefits paid out under a unit-linked life assurance scheme.

Random variable

A variable such as the return on an investment whose value depends on an uncertain future outcome. Note that the sum, product, square. logarithms, etc. of random variables are still random variables.

Rack rent

A property's rental value.


The percentage change in the value of an investment in a financial asset, or portfolio of financial assets, over a specified period.


An evaluation of the creditworthiness of a specific securities issue or borrower, made by an agency in the US such as Standard & Poor's or Moody's. Ratings grade from 'AAA’ for the most creditworthy to `DDD' for the least. Ratings change as the borrower's financial position changes. See also 'Investment grade'.

Real estate

This term refers to more than one property. See also 'Property'

Real Estate Investment Trust

or REIT. An investment fund similar to an investment company, the objective of which is to hold primarily real estate assets, either through mortgages, construction and development loans, or equity interests. See Appendix C.

Real return

Return after adjusting for inflation.

Redemption yield

The internal rate-of-return to be received from a dated bond held to maturity.

Reinvestment-rate risk

The uncertainty of the return on a fixed-income asset caused by unanticipated changes in the interest rate at which cash flows from the asset can be reinvested.

Rental value

The rent for a property if offered to let on the open market.

Rental yield

The yield on a property, as distinct from the dividend yield on equities and the interest yield on bonds.

Repurchase agreement

An agreement to sell securities and repurchase them at a later date. Both prices are agreed at the time of the initial sale. In effect this is an agreement to lend money upon collateral.


The date upon which the current lease comes to an end.


The Royal Institution of Chartered Surveyors, in the UK.


The uncertainty associated with the end-of-period value of an investment.

Risk-adjusted return

The return on an asset or portfolio, modified to explicitly account for the risk to which the asset or portfolio is exposed.

Risk-averse investor

An investor who prefers an investment with less risk over one with more risk, assuming that both investments offer the same expected return.


Often incorrectly used in the literature to denote 'risk-free' (see above).

Risk-neutral investor

An investor who has no preference between investments with varying levels of risk, assuming that the investments offer the same expected return.

Risk premium

The difference between the expected yield to maturity of a risky bond, and the expected yield to maturity of a similar bond which has no possibility of default attached.

Risk-seeking investor

An investor who prefers an investment with more risk over one with less risk, assuming that both investments offer the same expected return.


The requirement of an extra unit of return for each additional unit of risk.


Retail Price Index, in the UK.


Single Asset Property Companies.

Secondary market

A market for the sale and purchase of existing securities, as opposed to a market for the sale (or issue) of new securities. The latter is termed a primary market.


The process by which existing non-negotiable debt (such as bank loans) is changed into a security which is marketable.


A legal representation of the right to receive prospective future benefits under stated conditions. Also known as a Financial Asset


Securities and Futures Authority. Monitors the day-to-day activities of investment agents/intermediaries in the UK, such as stockbrokers, and dealers and traders The SFA is a weaker version of the Securities and Exchange, and Commodity Futures Trading, Commissions in the US. Note that the latter are both federal agencies.


Securities and Investments Board. A private body, funded by the UK financial services industry, which was set up to oversee the regulatory framework established by the Financial Services Act 1986. The SIB operates largely through self-regulatory organisations such as the SFA; see above.


Security Market Line. This represents the average, or normal, trade-off between risk and return for a group of securities, where risk is typically measured in terms of the equities βs.


The partial moment from –∞ to the mean. To paraphrase, the squared negative deviations from the mean.

Separation theorem

A feature of the CAPM that states that the optimal combination of risky assets for an investor can be determined without any knowledge of the investor's attitude toward risk and return.

Sharpe's Measure

or Reward-to-Variability Ratio. An ex post risk-adjusted measure of portfolio performance where risk is defined as the standard deviation of the portfolio's returns. Mathematically, it is the excess return of a portfolio divided by the standard deviation of the portfolio's excess returns, over an evaluation period.

Short sales

the ability to sell a security without owning it.


A measure of the asymmetry of a random variable. It is the third moment of the standardised random variable. Normal random variables have a skewness of zero.


Standarad & Poor’s

Size Effect, or Small Firm Effect

An empirical regularity whereby stock returns appear to differ consistently across the range of market capitalisation. Over extended periods of time, companies with smaller capitalisations have outperformed those with larger capitalisations, on a risk adjusted basis.


Single Property Ownership Trusts.


The difference between the buying and selling rates for financial securities and foreign exchange. It can also refer to the margin above the base rate such as LIBOR at which a specific loan is priced.

Standard Deviation

The standard deviation of a random variable is the square root of its variance.

Standardised Random Variable

Is derived from a random variable by subtracting the mean and dividing by the standard deviation.


A term often used in the US to denote an equity or share.

Stochastic process risk

In the context of immunisation, the risk that the yield curve will shift in a manner that prevents an immunised bond portfolio from producing its expected cash inflows.

Systematic risk

Incorrectly, but usually, used in financial literature to refer to Systemic Risk. This term could more usefully be employed to describe one of the risk elements in a particular system, which when combined comprise Systemic Risk.

Systemic risk

The undiversifiable element of risk, whether that be a particular market or economy.

Treasury Bill

A short-term non-interest bearing i.e. pure discount security issued by the US Treasury with a maximum term to maturity of not more than one year.

Treasury Bond

A security issued by the US Treasury with a term to maturity of over seven years. Interest is paid biannually, with the principal repaid at maturity.

Treasury Note

A security issued by the US Treasury with a term to maturity between one and seven years. Interest is paid biannually, with the principal repaid at maturity.

Treynor's Measure

or Reward-to-Volatility Ratio. An expost risk-adjusted measure of portfolio performance where risk is defined as the market risk of the portfolio. Mathematically, it is the excess return of a portfolio divided by the β of the portfolio, over an evaluation period.


A condition under which more than one future outcome is possible. Under uncertainty, a distribution of possible outcomes to any investment is assumed, as the actual outcome is not known.

Unique risk, or Unsystemic risk

The portion of a security's total risk that is not related to movement in the market portfolio, and therefore can be diversified away.

Unit investment trust

A US investment company, not to be confused with UK investment trusts or unit trusts. An initial sum of capital is raised from investors, which is then used to purchase a fixed portfolio of securities, typically bonds. The company is unmanaged, and has a finite life.

Unit Trust

Trust funds which are not stock exchange listed companies, but issue units representing the value of the underlying holdings in its portfolio. At least 90% of the portfolio must be held in shares tradeable on a stock market recognised by the UK. Use of futures and options is subject to strict guidelines. Unit trust prices are directly related to the value of their portfolio, and are calculated by reference to a formula laid down by the unit trust industry's selfregulatory organisation. The number of units issued increases or reduces in accordance with investor requirements. Dealings are normally conducted through the trust's managers, with dealing commission covered by the spread in bid and offer prices, usually 5% to 6%. Unit trusts cannot borrow money, and managers invariably maintain a 'float' of funds on deposit to meet possible redemptions. Not to be confused with 'unit investment trusts' in the US (see above).

The Value of holdings

Where institutional holdings in real estate are analysed, the figures provided relate to the market 'value' at year-end.

Value-weighted market index

or capitalisation-weighted market index. The index of a market in which the contribution of a security to the value of the index is a function of the security's market capitalisation.


The second central moment of a random variable. It is equal to the value of the expected squared deviations of the possible outcomes from the mean of a random variable. In a 'normal' distribution, the variance is a measure of the width of the distribution. The variance of the return, r, on an asset is given by

where is the average or expected return. Variance-Covariance matrix

A table that symmetrically arrays the covariances between a number of random variables. Variances of the random varibales lie on the diagonal of the matrix, whereas covariances between the random variables lie above and below the diagonal.

Weak-form market efficiency

A level of market efficiency in which all previous security price and volume data are fully and immediately reflected in current security prices.

Weekend effect

An empirical regularity whereby returns appear to be lower on Mondays than on other days of the (trading) week. Also known as the Day-of-the week effect.


Wells Fargo Investment Advisors.


Wilshire Associates. A fund performance evaluation service based in the US.


The World Markets Company. A UK company which provides, inter alia, a fund performance evaluation service.

Yield to maturity

For a particular fixed income security, the discount rate that equates the present value of fuure promised cash flows from the security to the current market price of the security.

Yield to reversion

An alternative name for the equivalent yield.

Zero coupon bond

or pure discount bond. A bond that is promised to be repaid by just one future payment to its owner.