A, B, C, D Flashcards
Accredited investor
Institutional investors that have net assets
of at least $5 million; or individual
investors that (alone or with a spouse) have
an aggregate realizable value exceeding $1
million or net income before taxes
exceeding $200,000 (or $300,000, if
combined with spouse) in each of the two
most recent years, and a reasonable
expectation of exceeding that same income
in the current year.
Active bond management
A bond management style that tries to
profi t from interest-rate risk by predicting
the direction or magnitude of rate changes.
Active portfolio management
A portfolio management style that
recognizes that securities markets are not
effi cient and adjusts a portfolio through
sector rotation, timing or momentum
strategies, or by the search for undervalued
stocks.
Advisors
Those people or companies that advise
clients on which investments to hold in
their portfolios.
Alpha
The measure of a manager’s skill in adding
value by taking active risk
Alternative investments
Investments that have different
performance characteristics from traditional
assets such as stocks and bonds; that are
rarely traded in the public capital markets;
that are relatively illiquid; that are relatively
uncommon in investment portfolios; that
have a relatively limited investment history;
and that require unconventional investment
skills on the part of the manager.
Asset mix committee
A committee, usually composed of the chief
investment offi cer and the heads of the
various asset class groups, which establishes
the target asset mix for the various
balanced-fund portfolios the fi rm manages.
Asset-backed securities (ABSs)
A type of bond whose cash fl ows are
supported by the cash fl ows from a specifi ed
pool of discrete assets
Audit
Verifying that all functions of the fi rm are
conducting their affairs and activities in
conformance with the operational
procedures established for the fi rm
(basically, that the rules established by the
compliance and the legal functions are
being followed).
Back-testing
The retrospective analysis of a potential
investment product.
Barbell portfolio
In a barbell portfolio, bonds are initially
purchased at both ends of the term
structure that is, the portfolio consists of
30-year and 1-year bonds.
Basis risk
The risk that the basis (the price difference
between an asset and its derivative) will not
behave as expected over the life of a hedge
Bearer form
Investments that were in bearer form meant
that the security certifi cate being exchanged
was negotiable and payable to the bearer
(this is referring to a time when transactions
were settled by the exchange of cheques
rather than electronically).
Benefi ciary
In a fi duciary relationship, the benefi ciary is
the person to whom a fi duciary owes a
fi duciary duty
Beta
The systematic risk or the extent to which
an investment moves with the overall
market
Board of trustees
An independent committee established to
oversee the operation of a pension plan
Bond swap
Normally involves the purchase of one
bond and the simultaneous sale of another
related or unrelated bond
Bottom-up approach
An investing style that focuses on the merits
of an individual security. It can take the
form of either a value-oriented or a
growth-oriented approach.
Box trade
Involves the simultaneous execution of a
pair of related fi xed-income security swaps
Buy-and-hold strategy
Purchasing bonds with available funds and
holding each bond to its maturity, thereby
avoiding the interest-rate risk on an early
sale.
Canadian Securities
Administrators (CSA)
A working group of regulators from each
provincial and territorial regulator; the CSA
is charged with forging uniformity in
regulation where possible.
Cash-collateralized debt obligation
A specifi c type of asset-backed security in
which the originator sells the collateral
(assets) for cash to a Special Purpose Vehicle
(SPV). The collateral can consist of
mortgage-backed securities, corporate
bonds, other ABSs or CDOs.
Cash-secured put option
Where the fund has adequate cash to
purchase the shares if the put option is
exercised.
Cellular sampling
A strategy used to recreate a fi xed-income
index portfolio where each of a bond’s three
dimensions—maturity, coupon and credit
risk—is applied to the total capital for the
fund and representatives of each cell are
bought in proportion to the total index
Chief compliance offi cer (CCO)
The person who is responsible for designing
and implementing a supervision system that
will provide the board of directors with
reasonable assurance that compliance
standards are being met.
Chief investment offi cer
The person within an investment
management fi rm who has overall
responsibility for the fi rm’s portfolio
management activities.
Clearing (of trades)
The process of confi rming and matching
security trade details.
Client services
Services offered by an investment management fi rm that provide current investors with timely and relevant information about their portfolios under management.
Closet indexing
The tendency of active managers to build a portfolio that is close enough to a performance benchmark so that the portfolio neither underperforms nor outperforms the benchmark by very much.
Code of ethics
Is an integral part of ensuring that a
discretionary portfolio manager’s fi duciary duty is performed and that all clients and
investors are treated fairly and
appropriately
Collateralized debt obligation
CDO
A security that repackages a collection of
underlying assets and sells multiple classes
(tranches) of the asset pool’s interest to
investors. A CDO can take a cash or
synthetic form.
Collective investment vehicles
See Pooled investment vehicles.
Commodities
An alternative investment class that offers
diversifi cation benefi ts when combined
with a traditional portfolio containing
equities and bonds
Commodity pools
Funds that buy and sell commodity futures
contracts
Compliance
Making sure the fi rm is running in such a
way that it is abiding by the rules and
regulations set by the securities regulators,
the terms set out in the fi rm’s investment
management agreements with investors,
and the fi rm’s own established best
practices.
Contingent immunization
Where a manager is willing to risk some of
the value of the portfolio in the practice of
active management, but at a certain lower
level would want to protect himself or
herself against further losses; often used as a
compromise between passive and active
bond management.
Corporate governance
The set of processes, customs, policies, laws
and institutions affecting the way an
investment management fi rm is directed,
administered or controlled.
Covered call option
A call that is sold with the underlying asset
already owned in the portfolio
Credit default swap
A type of credit derivative where an
exchange of two cash fl ows occurs: a fee
payment made by the buyer and a
conditional payment made by the seller,
made only if a credit event is triggered.
Credit derivatives
Financial instruments that derive their value
from an underlying credit asset or pool of credit assets, such as bonds or mortgages,
and are designed to transfer and manage
credit risk.
Currency cross-hedge
A transaction in which the mutual fund
substitutes its exposure to one currency risk
for exposure to risk from another currency,
as long as neither is the currency in which
the mutual fund’s net asset value is
determined.
Dealers
Individuals or companies who actually
trade securities.
Deferred sales charges (DSCs)
Alternative sales commission arrangements
where investors can pay the sales
commission on a deferred basis over time
Defi ned benefi t (DB) plan
A pension plan where entitlements are
typically calculated on the basis of the
employee’s salary profi le and tenure of
employment; these entitlements represent
liabilities of the sponsor.
Defi ned contribution (DC) plan
A pension plan where the benefi ciary is typically provided with a menu of investment choices (including mutual funds) among which to allocate regular contributions; the investment risk is borne entirely by the benefi ciary.
Delta
The price sensitivity of an option to
changes in the price of the underlying asset
Derivatives
A fi nancial contract whose value is derived
from, or depends on, the value of some
other asset.
Directional strategy
A hedge fund strategy that bets on
anticipated movements in the market prices
of equity securities, debt securities, foreign
currencies and commodities
Distributors
The investment dealers and mutual fund
dealers that employ the advisors who sell
PPNs.
Due diligence
The reasonable investigation of a proposed
investment and its principals with the goal
of ascertaining the investment’s worthiness
and appropriateness for particular types of
investors.
