CFA® Level I glossary.

The two parts of an investor's risk tolerance. Ability depends on objective factors such as time horizon, wealth and income relative to needs; willingness is the investor's psychological attitude to risk. When they conflict, the adviser usually follows the lower of the two.

The share of the next coupon earned by the seller since the last coupon date, which the buyer pays at settlement. It equals the coupon times the fraction of the coupon period that has passed.

A cognitive error in which people fix on an initial number, such as a purchase price or a previous forecast, and adjust too little when new information arrives.

Earning a riskless profit without net investment by exploiting price differences between assets with identical cash flows. Derivative pricing assumes no arbitrage, so identical payoffs must have the same price (the law of one price).

A commodity futures curve in which longer-dated futures prices are below the spot price, typically when the convenience yield of holding the physical commodity is high. Rolling long positions in backwardation tends to add to returns.

Net income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Stock splits and stock dividends are applied retroactively to all periods.

A rule for updating the probability of an event after new information arrives: the prior probability is multiplied by the likelihood of the information given the event, divided by the unconditional probability of the information.

A measure of an asset's systematic risk: the sensitivity of its returns to market returns. The market has a beta of 1; a beta above 1 means the asset tends to move more than the market.

Legally binding terms in a bond's indenture. Affirmative covenants require the issuer to do things, such as pay interest and maintain insurance; negative covenants restrict actions, such as taking on more debt or pledging assets to other lenders.

Recurring but irregular fluctuations in aggregate economic activity, usually described in four phases: recovery, expansion, slowdown and contraction. Analysts track it as a classical cycle (levels), growth cycle (output gap) or growth rate cycle.

A contract that gives its buyer the right, but not the obligation, to buy the underlying at the exercise price by or on the expiration date, in exchange for a premium. The buyer's loss is limited to the premium; the seller's potential loss is unlimited.

A bond the issuer may redeem before maturity at a set call price, typically after rates fall. The call option benefits the issuer, so a callable bond pays a higher yield than an otherwise identical option-free bond and shows negative convexity at low yields.

The line showing all combinations of the risk-free asset and a risky portfolio. Its slope is the risky portfolio's Sharpe ratio, and the best CAL is the one tangent to the efficient frontier.

An equilibrium model in which an asset's expected return equals the risk-free rate plus its beta times the market risk premium. It rests on assumptions such as homogeneous expectations, frictionless markets and borrowing and lending at the risk-free rate.

The capital allocation line that uses the market portfolio as the risky asset, valid when investors share the same expectations. Its slope is the market's Sharpe ratio; points to the right of the market portfolio involve borrowing.

The number of days between paying suppliers for inputs and collecting cash from customers: days of inventory plus days of sales outstanding minus days of payables. A shorter cycle means less cash tied up in working capital.

For large samples (usually n of 30 or more), the distribution of the sample mean is approximately normal, centred on the population mean with variance equal to the population variance divided by n, whatever the shape of the population distribution.

A term requiring the general partner to return previously paid incentive fees if later losses mean the fund's overall result does not justify them, so fees reflect the whole fund rather than early winners.

The six core principles that CFA Institute members and candidates must follow, such as acting with integrity, putting clients' interests and the integrity of the profession above their own, and keeping and developing their professional competence. The Standards of Professional Conduct turn these principles into specific rules.

The share of the total variation in the dependent variable that the regression explains. In simple linear regression it equals the squared correlation between X and Y.

Standard deviation divided by the mean, giving risk per unit of return. It allows comparison of dispersion between data sets with different means; a lower CV is better for a return series.

The two categories of behavioural bias. Cognitive errors come from faulty reasoning or memory and can often be corrected with better information; emotional biases come from feelings and impulses, are harder to correct, and are usually accommodated.

A security that redistributes the cash flows of mortgage pass-throughs into tranches with different exposure to prepayment risk, such as sequential-pay or planned amortization class (PAC) and support tranches. It reshapes, but does not remove, prepayment risk.

An aggregation of all discretionary portfolios managed to a similar strategy or objective. Requiring every such portfolio to be included stops firms from cherry-picking their best accounts when presenting performance.

A range around a point estimate that is expected to contain the true parameter with a stated probability (the confidence level). It equals the estimate plus or minus a reliability factor (z or t) times the standard error.

A cognitive error in which people seek and favour information that supports their existing beliefs and ignore or dismiss evidence against them, for example concentrating in a favourite stock.

A commodity futures curve in which longer-dated futures prices are above the spot price, typically when storage and financing costs outweigh any convenience yield. Rolling long positions in contango tends to lower returns.

A bond, mostly issued by banks, that automatically converts to equity or is written down when a trigger is hit, such as capital falling below a regulatory level. Unlike a normal convertible, conversion is forced and works against the bondholder.

The natural log of the ratio of ending to beginning price. Log returns add across periods, which makes multi-period calculations and simulation simpler.

A bond the holder can exchange for a set number of the issuer's common shares (the conversion ratio). Conversion value equals the conversion ratio times the share price; the option lets the issuer pay a lower coupon.

A measure of the curvature of the price-yield relationship, the second-order effect that duration misses. Option-free bonds have positive convexity: prices rise more when yields fall than they drop when yields rise by the same amount.

Covariance scaled by the two standard deviations, so it ranges from -1 to +1 and measures the strength of a linear relationship. Zero correlation means no linear link, not necessarily independence.

The net cost of holding the underlying until a forward's expiry: financing and storage costs minus any income or benefits such as dividends, coupons or convenience yield. The no-arbitrage forward price equals the spot price adjusted for carry.

The implied annual cost of not taking a supplier's early-payment discount and paying at the end of the credit period instead. Terms such as 2/10 net 30 imply a cost of over 40% a year, so the discount is usually worth taking.

Owning the underlying and selling a call on it. The premium adds income, but upside is capped at the exercise price; by put-call parity it has the same payoff as a risk-free bond minus a put.

The no-arbitrage relationship that sets the forward exchange rate so that a fully hedged foreign deposit earns the same as a domestic deposit. The currency with the higher interest rate trades at a forward discount.

A contract in which the protection buyer pays a periodic premium (the CDS spread) and the protection seller pays compensation, roughly the loss given default, if a defined credit event hits the reference entity.

Features that protect securitisation investors from losses on the pool. Internal forms include subordination, overcollateralisation (collateral worth more than the bonds issued) and excess spread; external forms include guarantees.

An exchange rate between two currencies derived from each one's rate against a third currency, usually the US dollar. Quotes are multiplied or one is inverted so the common currency cancels.

A voting system in which a shareholder gets votes equal to shares owned times the number of directors to be elected, and may cast them all for one candidate. It helps minority shareholders win board representation compared with statutory (straight) voting.

Current assets divided by current liabilities, a basic test of whether a company can meet obligations due within a year. A higher ratio signals more liquidity, though too high a ratio may mean idle assets.

A bond's annual coupon divided by its flat price. It ignores capital gains or losses and reinvestment, so it is only a rough measure of return.

Total debt divided by total shareholders' equity, a solvency measure of how much a company relies on borrowed money. Higher values mean more financial leverage and risk.

Future tax savings that arise when taxable income is temporarily higher than accounting profit, or from tax loss carryforwards, for example when warranty expenses are recognised in the books before they are deductible.

Income tax expected to be paid in future periods because taxable income is temporarily lower than accounting profit, for example when tax depreciation is faster than book depreciation. It arises when an asset's carrying amount exceeds its tax base.

A pension plan in which the employer promises a specified future benefit, usually based on salary and years of service, and bears the investment and longevity risk. The balance sheet shows the funded status: plan assets minus the defined benefit obligation.

The percentage change in operating profit for a given percentage change in sales. Companies with a higher share of fixed costs have higher operating leverage, so their profits swing more with revenue.

A security that trades like a domestic share but represents shares of a foreign company held by a custodian bank. American depository receipts (ADRs) trade in the US; global depository receipts (GDRs) trade outside the issuer's home market and the US.

A financial contract whose value depends on the price or level of an underlying, such as a share, bond, interest rate, currency, commodity or credit event. Derivatives are either firm commitments (forwards, futures, swaps) or contingent claims (options, credit derivatives).

EPS recalculated as if all dilutive potential common shares, such as convertibles, options and warrants, had been converted or exercised. Securities that would raise EPS (antidilutive) are left out, so diluted EPS is never above basic EPS.

A way to present operating cash flow by listing the actual cash receipts and payments, such as cash collected from customers and cash paid to suppliers and employees. It shows where cash came from and went, but is used less often than the indirect method.

The spread over the market reference rate that investors require on a floating-rate note, used to discount its cash flows. The quoted margin is the fixed spread in the coupon; an FRN trades at par on reset dates when the two are equal, at a discount when the discount margin is higher.

A present value model that values a share as the discounted sum of all expected future dividends, using the required return on equity as the discount rate.

The taxation of the same corporate profit twice: first as corporate income, then again as dividends in the hands of shareholders. Partnerships and other pass-through entities avoid it because profits are taxed only once, at the owner level.

A breakdown of return on equity into its drivers. The three-part version is net profit margin times asset turnover times financial leverage; the five-part version further splits margin into tax burden, interest burden and EBIT margin.

A bond's Macaulay duration minus the investor's investment horizon. A positive gap means price risk dominates, so rising rates hurt; a negative gap means reinvestment risk dominates, so falling rates hurt.

Total revenue minus all costs, including the implicit opportunity cost of the owners' capital and time. It is lower than accounting profit; zero economic profit means the firm earns just its required return.

Falling long-run average total cost as output rises, for example from specialisation or spreading fixed costs. Diseconomies of scale are the opposite; the lowest point on the long-run average cost curve is the minimum efficient scale.

The annual return actually earned once compounding within the year is included. It rises with compounding frequency, approaching e raised to the stated rate, minus one, under continuous compounding.

The sensitivity of a bond's price to a parallel shift in the benchmark yield curve, computed from prices produced by a valuation model. It is the right duration measure for bonds with embedded options, whose cash flows change when rates change.

Income tax expense divided by pretax income. It differs from the statutory rate because of permanent differences, foreign tax rates and other reconciling items disclosed in the notes.

The upper part of the minimum-variance frontier, starting at the global minimum-variance portfolio: the risky portfolios with the highest expected return for each level of risk. Rational, risk-averse investors choose only portfolios on it.

The value of a company's operations to all capital providers: market value of equity plus preferred stock and debt, minus cash and short-term investments. EV/EBITDA is useful for comparing companies with different capital structures.

Environmental, social and governance issues that can affect a company's risks, costs and long-term value, such as carbon emissions, labour practices and board independence. Analysts judge which factors are material for each industry and build them into forecasts and valuation.

The first date on which a share trades without the right to the declared dividend; buyers on or after this date do not receive it. The share price typically drops by about the dividend amount on this date.

A pooled fund, usually tracking an index, whose shares trade on an exchange throughout the day. Authorised participants create and redeem shares in kind, which keeps the market price close to net asset value.

The average loss expected from a credit exposure: probability of default times loss given default. Credit spreads must at least compensate investors for it.

An inventory cost method that assumes the oldest units are sold first, so cost of sales reflects older costs and ending inventory reflects recent costs. With rising prices it gives higher profit, higher inventory and higher taxes than LIFO.

A lease that effectively transfers control of the asset, for example through transfer of ownership, a bargain purchase option, or a term covering most of the asset's life. The lessee reports a right-of-use asset and lease liability, with depreciation and interest expense.

The ratio of the change in national income to the change in government spending that caused it. It is larger when the marginal propensity to consume is high and the tax rate is low.

The converged IFRS and US GAAP approach to revenue: identify the contract, identify the performance obligations, determine the transaction price, allocate it to the obligations, and recognise revenue as each obligation is satisfied.

An index weighting method that weights each stock by the market value of its shares available to the public, excluding blocks held by insiders, governments or controlling owners. It is the most common method for major equity indexes.

A private, customised over-the-counter agreement to buy or sell an underlying at a price fixed today for delivery on a future date. Neither side pays anything at inception, and each side bears the other's counterparty credit risk.

An over-the-counter forward contract on an interest rate for a future period, cash-settled on a notional amount. Its no-arbitrage fixed rate equals the implied forward rate from the current term structure.

The cash flow available to common shareholders after operating expenses, taxes, investment needs and net payments to or from lenders. It is the cash flow discounted at the cost of equity in an FCFE valuation.

The cash flow available to all capital providers, debt and equity, after operating expenses, taxes and investment in fixed and working capital. Interest is added back after tax because it is a payment to lenders.

Trading for one's own account ahead of a known pending client or employer order, or ahead of a research recommendation, to profit from the expected price move. It violates Standard VI(B) Priority of Transactions.

The price a buyer actually pays for a bond between coupon dates: the flat (clean) price plus accrued interest. Dealers quote the flat price so that quotes do not jump on coupon dates.

A fund that invests in several hedge funds, offering diversification, manager selection and due diligence, and access to closed funds. Investors pay a second layer of management and incentive fees on top of the underlying funds' fees.

A standardised, exchange-traded forward commitment that is marked to market daily, with gains and losses settled through margin accounts at a clearinghouse. Daily settlement largely removes counterparty credit risk.

The yield spread of a bond over an actual or interpolated government bond yield of the same maturity. It reflects credit, liquidity and tax differences relative to government debt.

The constant compound rate per period that turns the starting value into the ending value. It is always at or below the arithmetic mean, and the gap widens as returns become more volatile.

An optional review by an independent third party that tests whether a firm has met the GIPS requirements for composite construction and has policies to calculate and present performance correctly. It is done firm-wide and does not certify any single composite's returns.

Voluntary, ethical standards for calculating and presenting investment performance so that results are fair, comparable and fully disclosed. Only an investment firm (or asset owner) as a whole can claim compliance; individuals and single products cannot.

The excess of the price paid in a business acquisition over the fair value of the identifiable net assets acquired. It is not amortised but tested for impairment at least annually; internally generated goodwill is never recognised.

A dividend discount model that assumes dividends grow at a constant rate forever. It works only when the required return exceeds the growth rate and suits mature, stable dividend payers.

Investment in infrastructure that is still to be built, carrying construction and demand risk in return for higher expected returns. Brownfield investment buys existing, operating assets with established cash flows and lower risk.

The number of units of the underlying that makes a portfolio with one short call riskless in a one-period binomial model: the spread in option values divided by the spread in underlying prices.

The sum of the squared market shares of the firms in a market, a measure of concentration that reacts more strongly to mergers than the concentration ratio. With shares as decimals a monopoly scores 1 and 1/HHI is the equivalent number of equal-sized firms; with shares in whole percentages a monopoly scores 10,000.

The highest net asset value on which an incentive fee has been paid. After losses, the manager earns no new incentive fee until the fund value climbs back above the high-water mark, so the same gains are not charged twice.

The total return earned over the whole time an asset is held: price change plus any income, divided by the starting price. It is not annualised.

The minimum return a fund must earn before the manager receives an incentive fee. With a hard hurdle the fee applies only to returns above the hurdle; with a soft hurdle, once it is cleared, the fee applies to the whole return.

The yield spread of a bond over the swap rate of the same maturity, rather than over a government bond yield. It is widely used for bonds of financial institutions and floating-rate funding.

The method for including convertible preferred shares or bonds in diluted EPS: assume conversion at the start of the period, add back the preferred dividends or after-tax interest to the numerator, and add the new shares to the denominator.

A write-down of an asset whose carrying amount is higher than what it can recover. IFRS compares carrying amount with the recoverable amount (higher of fair value less costs to sell and value in use) and allows reversals; US GAAP uses a two-step recoverability test and forbids reversals for assets held for use.

The interest rate for a future period implied by today's spot rates, such that investing to the longer date gives the same return as investing to the shorter date and rolling over at the forward rate.

The share of profits paid to the manager, often 20%, on top of the management fee. In private equity it is called carried interest and is usually paid only after investors receive a hurdle return.

A way to present operating cash flow that starts with net income, adds back non-cash charges such as depreciation, removes non-operating gains and losses, and adjusts for changes in working capital accounts. Both methods give the same total CFO.

A monetary policy framework in which an independent, credible central bank publicly commits to keep inflation close to an announced target, typically around 2%, and sets its policy rate to that end.

EBIT divided by interest expense, showing how many times operating earnings cover interest payments. A higher ratio indicates stronger solvency and more room before a company struggles to service its debt.

The discount rate that makes a project's NPV equal to zero. Accept the project if the IRR exceeds the required return; when NPV and IRR rank mutually exclusive projects differently (because of scale or timing), follow NPV.

The value of a security based on a complete understanding of its fundamentals, usually estimated as the present value of expected future cash flows. If an analyst's estimate is above the market price, the security appears undervalued.

Cost of sales divided by average inventory, showing how many times inventory is sold and replaced in a period. Days of inventory on hand equals 365 divided by turnover; high turnover can signal efficiency or inventory that is too lean.

A written plan agreed between an investor and adviser that sets out the investor's return and risk objectives, constraints (liquidity, time horizon, tax, legal and unique circumstances), and how the portfolio will be managed, monitored and reviewed.

The typical pattern of private equity fund returns: negative in the early years as fees and investment costs come before gains are realised, then rising as investments mature and are exited.

The portfolio's actual return minus the return the CAPM predicts for its beta. A positive alpha indicates outperformance after adjusting for systematic risk.

The price-to-earnings ratio implied by fundamentals, derived from the Gordon growth model. The justified forward P/E equals the payout ratio divided by the difference between the required return and the growth rate.

The sensitivity of a bond's or portfolio's value to a change in the yield at one specific maturity on the benchmark curve, holding others constant. Key rate durations add up to effective duration and measure exposure to changes in curve shape.

A measure of how much of a distribution sits in its tails compared with a normal distribution, whose kurtosis is 3. Excess kurtosis is kurtosis minus 3; a positive value (leptokurtic, fat-tailed) means extreme returns occur more often than the normal predicts.

Economic series that tend to turn before the overall economy, such as building permits, new orders, stock prices and the yield curve slope. Coincident indicators move with the cycle and lagging indicators turn after it.

The value of a position divided by the investor's equity in it. The maximum leverage ratio equals one divided by the initial margin requirement, and returns on equity are roughly the asset return times the leverage ratio.

The acquisition of a company, usually a mature one with steady cash flow, by a private equity firm using a large amount of borrowed money. Returns come from improving operations, paying down debt and selling at a higher multiple.

An inventory cost method that assumes the newest units are sold first, so cost of sales reflects current costs. Allowed under US GAAP but not IFRS; with rising prices it lowers reported profit and taxes and understates inventory on the balance sheet.

A fall in inventory quantities under LIFO that pushes old, low-cost layers into cost of sales. In a period of rising prices it inflates gross margin with a non-recurring gain and is a warning sign for earnings quality.

The difference between inventory valued under FIFO and under LIFO, disclosed by LIFO users. Analysts add it to LIFO inventory to restate to FIFO, and use the change in the reserve to restate cost of sales.

An order to buy at no more than, or sell at no less than, a specified price. It protects against a bad price but may not be filled; a buy limit below the best offer is said to be behind the market.

The usual structure for private equity, real estate and hedge funds. The general partner (GP) manages the fund and has unlimited liability; limited partners (LPs) provide most of the capital, have limited liability and take no part in management.

An emotional bias in which people feel losses much more strongly than equal gains. It leads investors to hold losing positions too long, hoping to break even, and to sell winners too early (the disposition effect).

The amount, or share of exposure, an investor loses if the borrower defaults: one minus the recovery rate. Secured and senior claims usually have lower LGD than subordinated ones.

A risk-adjusted performance measure that scales a portfolio to the market's total risk and reports its return in percentage terms. It ranks portfolios the same way as the Sharpe ratio, and M² alpha (M² minus the market return) shows the outperformance directly.

The weighted average time to receipt of a bond's cash flows, with each time weighted by the share of the bond's price that its cash flow represents. It is also the investment horizon at which price risk and reinvestment risk offset each other.

The minimum balance a futures trader must keep in the margin account. If losses push the balance below it, the trader receives a margin call and must deposit variation margin to bring the account back to the initial margin level.

An annual fee paid to an alternative fund manager regardless of performance, typically 1% to 2%, charged on assets under management for hedge funds or on committed capital for private equity funds.

The price at which the equity in a leveraged long position falls to the maintenance margin, so the broker demands more collateral.

The degree to which prices quickly and fully reflect available information. In an efficient market, investors cannot consistently earn abnormal returns after costs and risk using information that is already reflected in prices.

An order to trade immediately at the best price currently available. It gives fast execution but no control over price, which matters for large orders or illiquid securities.

An event-driven hedge fund strategy that buys the shares of a takeover target and, in a share deal, shorts the acquirer, to capture the spread that remains until the deal closes. The main risk is that the deal fails.

Valuing a stock by comparing its price multiple, such as P/E or P/B, with a benchmark multiple from similar companies or an index. It shows relative, not absolute, value: if the whole peer group is overpriced, the stock may be too.

Macaulay duration divided by one plus the yield per period. It estimates the percentage change in a bond's price for a 1% (100 bp) change in its yield.

In perfect markets without taxes, a firm's value does not depend on its capital structure: a levered firm is worth the same as an unlevered one. With corporate taxes, the levered firm is worth more by the present value of the interest tax shield.

The cost of equity rises linearly with the debt-to-equity ratio because more debt makes equity riskier. Without taxes, this exactly offsets the cheaper debt so the WACC stays constant.

Modified duration times the bond's full price, giving the estimated change in price in currency units for a change in yield.

The internal rate of return on a portfolio's cash flows, so it is affected by the size and timing of the investor's deposits and withdrawals. It suits judging the investor's own experience rather than the manager's skill.

Whether an option would have positive value if exercised now. A call is in the money when the underlying price is above the exercise price, and a put when it is below; at the money means they are equal.

A market structure with many firms selling differentiated products, low barriers to entry and some pricing power from branding and advertising. Firms can earn economic profit in the short run, but entry drives it to zero in the long run.

A technique that generates thousands of random scenarios for the risk factors from assumed probability distributions and values the asset or portfolio in each, building a distribution of outcomes. It is used for complex securities, risk measures such as VaR and testing models, but is only as good as its assumptions.

The principle that an analyst may reach a conclusion by combining public information with nonmaterial nonpublic information without violating Standard II(A), even if the conclusion would have been material had it come from an insider.

Total value of an investment (realised plus unrealised) divided by the capital invested. It is simple but ignores the timing of cash flows, so it is used alongside IRR.

A set of strategies in which no player can improve its outcome by changing its own choice, given what the others are doing. In oligopoly games it explains why firms may end up with a lower joint profit than collusion would give.

The present value of a project's expected cash flows, discounted at the required rate of return, minus the initial investment. A positive NPV means the project is expected to add value to shareholders, and NPV is the preferred rule when choosing between mutually exclusive projects.

Estimated selling price less the estimated costs to complete and sell. Under IFRS (and US GAAP for non-LIFO inventory), inventory is carried at the lower of cost and NRV, with write-downs recognised as an expense.

The increase in a product's or platform's value to each user as more users join. Strong network effects can create winner-takes-most markets and durable competitive advantages for platform business models.

The policy rate that neither stimulates nor restrains the economy, often estimated as trend real growth plus the inflation target. A policy rate above it is contractionary and one below it is expansionary.

Performance measures that a company reports outside its official accounting standards, such as adjusted EBITDA. Regulators require them to be reconciled to the nearest GAAP measure; analysts check what has been excluded and whether exclusions recur.

Risk unique to a company or industry, such as a product failure or a strike, that can be removed by holding a diversified portfolio. Because investors can diversify it away, the market does not reward it.

A market dominated by a few interdependent firms behind high barriers to entry, where each firm's best price and output depend on how rivals respond. Pricing models include kinked demand, Cournot, Stackelberg and dominant-firm price leadership.

Central bank purchases or sales of government securities, often via repos, to add or drain bank reserves. Buying securities expands reserves and the money supply; selling them contracts it.

Under US GAAP, a lessee lease that does not meet the finance lease criteria. The lessee still records a right-of-use asset and lease liability, but recognises a single straight-line lease expense, and all cash payments appear in operating cash flow.

The spread of a bond with embedded options after removing the value of those options: Z-spread minus the option value in basis points. For a callable bond the OAS is below the Z-spread, since investors are compensated for the call risk.

An emotional bias in which people overestimate their knowledge, abilities or the precision of their forecasts. It leads to under-diversification, excessive trading and underestimating risk.

The smallest significance level at which the null hypothesis can be rejected, given the sample. Reject the null when the p-value is below the chosen significance level.

The coupon rate at which a bond of a given maturity would be priced at par, given the spot curve. Par rates for each maturity form the par curve, which is used to set coupons on new issues.

The fixed rate that gives a swap zero value at inception, so the present value of fixed payments equals that of the expected floating payments. It equals the coupon on a par bond priced off the same discount factors.

The theory that, because managers know more than investors, companies prefer internal funds first, then debt, and issue new equity only as a last resort, since a share issue can signal that management thinks the stock is overvalued.

A market structure with many sellers of an identical product, no barriers to entry and no pricing power: each firm is a price taker facing a perfectly elastic demand curve. In the long run firms earn zero economic profit.

A checklist of external influences on an industry: political, economic, social, technological, legal and environmental factors. Analysts use it to identify trends that could change an industry's growth and profitability.

A framework for judging an industry's profit potential through five competitive forces: threat of new entrants, threat of substitutes, bargaining power of buyers, bargaining power of suppliers, and rivalry among existing competitors.

The uncertainty in mortgage-backed securities' cash flows caused by borrowers repaying early. Contraction risk is faster prepayment when rates fall, forcing reinvestment at lower rates; extension risk is slower prepayment when rates rise, lengthening the security's life.

Charging different customers different prices for essentially the same product, based on their willingness to pay, for example through volume tiers, time-based pricing or versioning. It requires pricing power and a way to stop resale.

The estimated change in a bond's price for a one basis point change in yield, a money measure of interest rate risk widely used by traders and hedgers.

Share price divided by book value of equity per share. It is useful for companies with mostly liquid, fairly valued assets such as banks, but book value can be distorted by accounting choices and missing intangibles.

An index whose value is the sum of its members' share prices divided by a divisor, so higher-priced stocks carry more weight regardless of company size. The divisor must be adjusted after stock splits to keep the index value unchanged.

The conflict that arises when an agent, such as a manager, acts for a principal, such as shareholders, but has different interests and better information. Agency costs include the cost of monitoring managers and the value lost when their choices diverge from owners' interests.

A blockchain consensus mechanism in which validators lock up (stake) their own coins for the right to confirm transactions and earn rewards, risking the stake if they act dishonestly. Proof of work instead uses miners solving costly computational puzzles, which uses far more energy.

Owning the underlying and buying a put on it. The put sets a floor on losses at the exercise price minus the premium while keeping upside, like insurance on the position.

A contract that gives its buyer the right, but not the obligation, to sell the underlying at the exercise price by or on the expiration date. The buyer profits when the underlying falls below the exercise price by more than the premium paid.

The no-arbitrage relationship between European calls and puts with the same underlying, exercise price and expiration: a protective put (share plus put) must cost the same as a fiduciary call (call plus a risk-free bond paying the exercise price).

A bond that gives the investor the right to sell it back to the issuer at a set price before maturity, typically used when rates rise. Because the option benefits the investor, it yields less than an otherwise identical option-free bond.

Large-scale purchases of government bonds and other assets by a central bank, used when the policy rate is near zero, to push down longer-term rates and add reserves to the banking system.

A stricter liquidity ratio that counts only cash, short-term marketable investments and receivables against current liabilities, leaving out inventory and prepaid items that are harder to turn into cash quickly.

A company, often publicly traded, that owns or finances income-producing real estate and distributes most of its taxable income to shareholders, usually avoiding tax at the corporate level. REITs give liquid, indirect access to real estate.

The nominal exchange rate adjusted for the relative price levels of the two countries, measuring the real purchasing power of one currency against another.

Options embedded in real investment projects, such as the right to delay, expand, abandon or switch inputs or outputs. They give managers flexibility, and their value is added to the project's ordinary NPV.

A sale of a security combined with an agreement to buy it back later at a higher price, in effect a collateralised loan. The repo rate is the implied interest rate; the haircut (initial margin) is the gap between the collateral's value and the cash lent.

Net income divided by average shareholders' equity, measuring the return earned on the owners' capital. It can be raised by better margins, faster asset turnover or more leverage, which DuPont analysis separates.

After-tax operating profit divided by average invested capital (debt plus equity). A company creates value when its ROIC exceeds its cost of capital.

An investor's preference for less risk at a given expected return. In the utility function used at Level I, a higher risk aversion coefficient A gives a bigger penalty for variance; A is positive for risk-averse, zero for risk-neutral and negative for risk-seeking investors.

The probability of an up move implied by no-arbitrage in a binomial model, under which the underlying is expected to earn the risk-free rate. Option values are expected payoffs under these probabilities discounted at the risk-free rate; they are not real-world probabilities.

The number of standard deviations by which a portfolio's expected return exceeds a minimum acceptable (threshold) return. The portfolio with the highest ratio has the lowest probability of falling below the threshold, assuming normal returns.

Pooling loans or receivables, such as mortgages or auto loans, and selling securities backed by the pool's cash flows. It moves assets off the originator's balance sheet, frees capital for new lending and gives investors access to diversified credit exposure.

The graph of the CAPM, plotting expected return against beta. Securities plotting above the SML appear undervalued (positive alpha) and those below appear overvalued; unlike the CML, it applies to individual assets as well as efficient portfolios.

The form of market efficiency in which prices reflect all publicly available information, including financial statements and news. If it holds, neither technical nor fundamental analysis of public data can earn abnormal returns; event studies test it.

Excess return per unit of total risk: a portfolio's return above the risk-free rate divided by its standard deviation. It suits a portfolio that is the investor's whole holding; it ranks portfolios but does not show how much better one is in percentage terms.

Selling a borrowed security in the hope of buying it back later at a lower price. The short seller pays the lender any dividends, posts margin, and faces potentially unlimited losses if the price rises.

The price at which a firm is indifferent between operating and shutting down in the short run, equal to minimum average variable cost. Below it the firm should stop producing; between AVC and ATC it keeps operating at a loss to cover part of its fixed costs.

A model that explains a dependent variable with one independent variable through a straight line. Ordinary least squares chooses the intercept and slope that minimise the sum of squared residuals.

A measure of how asymmetric a distribution is. With positive (right) skew the mean lies above the median and a few large gains stretch the right tail; with negative skew the mean lies below the median and large losses are more likely.

The yield on a zero-coupon bond for a given maturity. Pricing each cash flow at the spot rate for its own date gives a bond's no-arbitrage value; the set of spot rates across maturities is the spot curve.

The view that a company should balance the interests of all its stakeholders, including employees, customers, suppliers, creditors, governments and communities, rather than focus only on shareholder value (shareholder theory).

The standard deviation of the sampling distribution of the sample mean. It shrinks as sample size grows, so larger samples give more precise estimates of the population mean.

Members must understand and comply with all laws, rules and regulations that apply to their work, and with the Code and Standards. Where the two differ, they follow the stricter one; they must not knowingly take part in a violation and should dissociate from one they become aware of.

Members must use reasonable care and judgment to stay independent and objective, and must not give, ask for or accept gifts or benefits that could reasonably be expected to compromise anyone's independence. Modest, customary gifts are usually acceptable; issuer-paid research should be for a flat fee, not tied to the conclusion.

Members must not knowingly make false or misleading statements about investment analysis, recommendations, actions or other professional activities. Plagiarism, overstating qualifications and guaranteeing returns on risky investments are classic violations.

Members must not engage in professional conduct involving dishonesty, fraud or deceit, or commit any act that reflects badly on their professional reputation, integrity or competence. Purely personal behaviour unrelated to professional integrity is generally outside its scope.

Members must act with, and maintain, the competence their professional responsibilities require. The level depends on the role, and the Standard does not mandate any particular continuing-education program.

Members who possess information that is both material (likely to affect price or a reasonable investor's decision) and nonpublic must not act on it or cause others to act on it. Firms typically control such information with firewalls and restricted or watch lists.

Members must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants. Spreading false rumours and trading to create a false impression of activity are examples; intent to mislead is the key test.

Members owe clients loyalty and must act with reasonable care and prudent judgment, placing clients' interests before their employer's and their own. For a fund or plan, the client is usually the beneficiaries; proxy voting and soft-dollar use must also benefit the client.

Members must deal fairly and objectively with all clients when giving investment analysis, making recommendations or taking investment action. Fair does not mean identical: firms may offer different service levels if they are disclosed, but recommendation changes must reach all clients fairly and trade allocations must not favour some clients.

In an advisory relationship, members must learn a client's objectives, risk tolerance and constraints, judge each investment in the context of the whole portfolio, and update the information regularly. When managing to a mandate, they must invest only in line with the stated strategy.

Members must make reasonable efforts to ensure performance information is fair, accurate and complete. Presenting only the best accounts, showing simulated results as real, or claiming a previous employer's record without disclosure all violate it.

Members must keep information about current, former and prospective clients confidential unless it concerns illegal activity, disclosure is required by law, or the client permits it. Cooperating with a CFA Institute Professional Conduct Program investigation is not a breach.

Members must act for the benefit of their employer and not deprive it of their skills, divert its business or cause it harm. They may prepare to leave while employed, but must not take client lists, files or other employer property without permission.

Members must not accept gifts, benefits or compensation that compete with, or might create a conflict with, their employer's interest unless they get written consent from all parties involved. Consent from the employer alone is not enough.

Members with supervisory authority must make reasonable efforts to ensure that people they supervise comply with laws, rules and the Code and Standards. If the firm's compliance procedures are inadequate, the supervisor should decline supervisory responsibility until adequate procedures exist.

Members must be diligent, independent and thorough in analysis, and have a reasonable and adequate basis, supported by research, for every recommendation or action. Relying on third-party or group research is allowed if its soundness has been reasonably checked.

Members must disclose the nature and cost of their services, the basic format and principles of their investment process and any material changes to it, the significant risks and limitations of an investment, and must distinguish fact from opinion.

Members must develop and keep appropriate records that support their investment analysis, recommendations and communications with clients. The records belong to the firm; if no law or regulation sets a period, CFA Institute recommends keeping them for at least seven years.

Members must either avoid, or make full and fair disclosure of, any matter that could reasonably impair their independence and objectivity or interfere with duties to clients, prospects and employer. Disclosures must be prominent and in plain language.

Client and employer transactions must take priority over trades in which the member has a beneficial ownership interest. Front-running client orders is the classic violation; blackout periods and pre-clearance are common safeguards.

Members must disclose to their employer, clients and prospects, as appropriate, any compensation or benefit received from or paid to others for recommending products or services. This lets clients judge the full cost and any bias in the referral.

Members and candidates must not compromise the reputation or integrity of CFA Institute, the CFA designation or the integrity, validity or security of CFA Institute programs. Cheating, sharing confidential exam content and misusing the exam process are violations; expressing opinions about the program is not.

Members and candidates must not misrepresent or exaggerate the meaning or implications of CFA Institute membership, the CFA designation or candidacy in the CFA® Program. The designation must be used as an adjective, never as a noun, and there is no partial designation for having passed only some exam levels.

The seven groups of rules (Standards I to VII) that set out how CFA Institute members and candidates must behave towards the law, markets, clients, employers and the CFA designation. Exam questions ask whether a described action violates a specific Standard.

The theory that a company's optimal capital structure balances the tax benefit of debt against the expected costs of financial distress. Value is maximised, and WACC minimised, at the point where an extra unit of debt adds as much distress cost as tax saving.

The long-term target weights for each asset class that best meet the investor's objectives and constraints in the IPS. It is the main driver of a portfolio's risk and return over time.

The form of market efficiency in which prices reflect all information, public and private. Evidence that insiders can earn abnormal returns shows that markets are generally not strong-form efficient.

Overstatement of index or database returns because failed or closed funds drop out and only survivors remain. Backfill bias is the related distortion when a newly added fund's strong past returns are added to the history.

The rate at which a company can grow its earnings and dividends from retained earnings alone, without changing its capital structure: the retention ratio times return on equity.

An agreement to exchange a series of cash flows over time, such as fixed-rate for floating-rate interest payments on a notional principal. A swap can be viewed as a series of forward contracts, and its value is zero at inception.

Risk that affects the whole market, such as changes in interest rates or economic growth, and cannot be removed by diversification. Only systematic risk, measured by beta, is rewarded with a risk premium under the CAPM.

Deliberate short-term deviations from the strategic asset allocation to exploit expected market opportunities. It adds active risk and must be judged against the return of the policy weights.

A tax on imported goods. In a small country it raises the domestic price by the tariff, increasing domestic production and government revenue but reducing consumer surplus by more, so national welfare falls (the deadweight loss).

A difference between an asset's or liability's carrying amount and its tax base that will reverse in the future, creating a deferred tax asset or liability. Permanent differences, such as non-deductible fines, never reverse and instead change the effective tax rate.

The part of an option's premium above its exercise value, reflecting the chance that the option becomes more valuable before expiration. It falls to zero at expiration, a process called time value decay.

The compound growth of one unit invested, found by linking sub-period returns between external cash flows. Because it removes the effect of client deposits and withdrawals, it is the standard measure of a manager's performance.

The method for including options and warrants in diluted EPS: assume exercise, and assume the cash received is used to repurchase shares at the average market price. Only the net new shares are added, and only if the options are in the money.

Excess return per unit of systematic risk: a portfolio's return above the risk-free rate divided by its beta. It suits evaluating a well-diversified portfolio that is part of a larger holding.

Rejecting a null hypothesis that is actually true. Its probability equals the significance level (alpha) chosen for the test.

Failing to reject a null hypothesis that is actually false. For a given sample size, lowering the significance level to reduce Type I errors raises the probability of a Type II error.

Under US GAAP, a contra-account that reduces a deferred tax asset when it is more likely than not that some of it will not be realised. Changes in the allowance move reported net income, so analysts watch it for earnings management.

An estimate of the minimum loss a portfolio is expected to suffer with a given small probability over a given period, for example a 5% one-day VaR of 2 million. It says nothing about how large losses can be beyond that threshold.

Private equity investment in start-ups and early-stage companies with high growth potential, usually in stages from seed to later rounds. Most investments fail, so returns depend on a few large successes.

The form of market efficiency in which prices reflect all past market data, such as prices and trading volume. If it holds, technical analysis cannot earn abnormal returns.

The average rate a company must pay its capital providers, weighting the after-tax cost of debt and the cost of equity by their target proportions in the capital structure. It is the discount rate for average-risk projects and for free cash flow to the firm.

The single discount rate that makes the present value of a bond's promised cash flows equal its price: the bond's internal rate of return. It is realised only if the bond is held to maturity, every payment is made in full and coupons are reinvested at the same yield.

The lowest of a callable bond's yield-to-maturity and its yields to each possible call date. It is a conservative yield measure for bonds with call options.

The constant spread that, added to every rate on the government spot curve, makes the present value of a bond's cash flows equal its price. Unlike the G-spread, it uses the whole spot curve, not a single yield.