MARKET ANAMOLY Definition

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MARKET ANAMOLY is a persistent and systematic differential of returns that cannot be accounted for by systematic risk factors, i.e. it is an inexplicable price distortion on a market.

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STANDARD OF VALUE is the identification of the type of value being utilized in a specific engagement; e.g. fair market value, fair value, investment value.

CONVEXITY is the price change that occurs for a bond not accounted for or predicted by modified dU1"ation. Convexity explains why price change estimates using modified duration increase in error as the yield changes, generally by more than 100 basis points. Bonds with positive (negative) convexity have increased (decreased) duration as interest rates fall (rise). Bonds with positive convexity, such as those with put options, have returns higher than those predicted by duration alone. Mortgage-backed securities and callable bonds gener­ally have negative convexity, which means that the price increase predicted by duration for a steep rate decline is too high.

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