Black monday

Monday October 19th 1987 when Wall Street had its worst day since 1914. The Dow Jones Industrial Average fell 508 points from 2,247 to 1,738, or 22.6%. This triggered panic selling in equity markets around the world and, for example, on the same day the UK's all-share index fell 9-7% from 1,190 to 1,075, then dropped a further 11% the following day. Until that point 1987 had been a great year for equities. From the start of the year until its mid-August peak, the Dow rose 44%. However, rising interest rates caused investors to worry and the German Bundesbank's decision to increase its rates on October 16th was the cue for them to dash for the exit.

The Dow bounced back rapidly from its low. On October 26th alone it put on 10%. The UK index, however, continued to fall and did not bottom out until December 3rd, when it closed at 750, 39% below its mid-year peak.

Balanced fund

A mutual fund that invests in a combination of ordinary share and bonds (including government debt). As such, it has a wide spread of assets and could be considered medium risk, in contrast to funds that are invested wholly in equities (high risk) and wholly in bonds (low risk). The consequence of this should be that the investment return of a balanced fund will be pedestrian compared with an equity fund during a bull market, but will do well during a bear market.

Arbitrage

To arbitrage is to make a profit without risk and, therefore, with no net exposure of capital. In practice, it requires an arbitrager simultaneously to buy and sell the same asset - or, more likely, two bundles of assets that amount to the same - and pocket the difference. Before financial markets were truly global, arbitraging was most readily identified with selling a currency in one financial center and buying it more cheaply in another. The game has now moved on a little, but, for example, there would be the potential to make risk-free profits if dollar interest rates were sufficiently high to allow traders to swap their euros for dollars and be left with extra income after they had covered the cost of their currency insurance by selling dollars forward in the futures market. Similarly, arbitrage opportunities can be exploited by replicating the features of a portfolio of shares through a combination of equity futures and bonds then simultaneously selling the actual stocks in the market. (See risk arbitrage)