CFA #4

Question 1

Utilitarianism

Answer 1

A principle that states that we should strive to achieve “the greatest happiness for the greatest number of people.”

Question 2

Validity instructions

Answer 2

Instructions which indicate when the order may be filled.

Question 3

Valuation

Answer 3

The process of determining the value of an asset of service.

Question 4

Valuation allowance

Answer 4

A reserve created against deferred tax asset, based on the liklihood of realizing the deferred tax assets in future accounting periods.

Question 5

Valuation ratios

Answer 5

Ratios that measure the quantity of an asset or flow (e.g., earnings) in relation to the price associated with a specified claim (e.g., a share or ownership of the enterprise).

Question 6

Value

Answer 6

The amount for which one can sell something, or the amount one must pay to acquire something.

Question 7

Value (market-capitalization) weighted index

Answer 7

An index in which the weight on each constituent security is determined by dividing its market capitalization by the total market capitalization (the sum fo the market capitalization) of all the securities in the index.

Question 8

Value at risk (VAR)

Answer 8

A money measure of the minimum value of losses expected during a specified time period at a given level of probability.

Question 9

Value investors

Answer 9

With reference to equity investors, investors who are focused on paying a relatively low share price in relation to earnings or assets per share.

Question 10

Value stocks

Answer 10

Stocks that appear to be undervalued for reasons besides earnings growth potential. These stocks are usually identified based on high dividend yields, low P/E ratios, or low price-to-book ratios.

Question 11

Variable costs

Answer 11

Costs the fluctuate with the level of production and sales.

Question 12

Variance

Answer 12

The expected value (the probability weighted average) of squared deviations from a random variable’s expected value.

Question 13

Variation margin

Answer 13

Additional margin that must be deposited in an amount sufficient to bring the balance up to the initial margin requirement.

Question 14

Vega

Answer 14

The relationship between option price and volatility.

Question 15

Velocity of circulation

Answer 15

The average number of times a dollar of money is used anually to buy the goods and services that make up GDP.

Question 16

Venture capital

Answer 16

Investments that provide “seed” or start-up capital, early-stage financing, or mezzanine financing to companies that are in the early stages of development and require additional capital for expansion.

Question 17

Venture capital fund

Answer 17

A fund for private equiy investors that provides financing for development-stage companies.

Question 18

Ventures

Answer 18

The owners of a joint venture. Each is active in the management and shares control of the joint venture.

Question 19

Vertical analysis

Answer 19

Common-size analysis using only one reporting period or one base financial statement; for example, an income statement in which all items are stated as percentages of sales.

Question 20

Vertical common-size analysis

Answer 20

The most commmon type of common-size analysis, in which accounts in a given period are compared to a benchmark item in the same year.

Question 21

Vertical merger

Answer 21

A merger involving companies at different positions of the same production chain; for example, a supplier or distributor.

Question 22

Vested benefit obligation

Answer 22

Under U.S. GAAP, a measure used in estimating a defined-benefit pension plan’s liabilities, defined as the “actuarial present value of vested benefits.”

Question 23

Vested benefits

Answer 23

Future benefits promised to the employee regardless of continuing service. Benefits typically vest after a specified period of service or a specified period of service combined with age.

Question 24

Vesting date

Answer 24

The date that employees can first exercise stock options; vesting can be immediate or over a future period.

Question 25

Volatility

Answer 25

As used in option pricing, the standard deviation of the continuously compounded returns on the underlying asset.

Question 26

Vote by proxy

Answer 26

A mechanism that allows a designated party–such as another shareholder, a shareholder representative, or management–to vote on the shareholder’s behalf.

Question 27

Warehouse receipt arrangement

Answer 27

The use of inventory as collateral for a loan; similar to a trust receipt arrangement except there is a third party (i.e., a warehouse compay) that supervises the inventory.

Question 28

Weak-form effficient market hypothesis

Answer 28

The belief that security prices fully reflect all past market data, which refers to all historical price and volume trading information.

Question 29

Weighted average cost method

Answer 29

An inventory accounting method that averages the total cost of availabe inventory items over the total units available for sale.

Question 30

Weighted mean

Answer 30

An average in which each ovservation is weighted by an index of its relative importance.

Question 31

Weighted-average cost of capital

Answer 31

A weighted average of the after-tax required rates of return on a company’s common stock, preferred stock, and long-term debt, where the weights are the fraction of each source of financing in the company’s target capital structure.

Question 32

White knight

Answer 32

A third party that is sought out by the target company’s board to purchase the target in lieu of a hostile bidder.

Question 33

White squire

Answer 33

A third party that is sought out by the target company’s board to purchase a substantial minority stake in the target–enough to block a hostile takeover without selling the entire company.

Question 34

White-corrected standard errors

Answer 34

A synonym for robust standard errors.

Question 35

Winner’s curse

Answer 35

The tendency for the winner in certain competitive bidding situations to overpay, whether because of the overestimation of intrinsic alue, emotion, or information asymmetries.

Question 36

Winsorized mean

Answer 36

A mean computed after assigning a stated percent of the lowest values equal to one specified low value, and a stated percent of the highest values equal to one specified high value.

Question 37

Working capital

Answer 37

The difference between current assets and current liabilities.

Question 38

Working capital management

Answer 38

The management of a company’s short-term assets (such as inventory) and short-term liabilities (such as money owed to suppliers).

Question 39

Working capital turnover

Answer 39

A comparison of revenues with working capital to produce a measure that shows how efficiently working capital is employed.

Question 40

Working-age population

Answer 40

The total number of people aged 15 years and over.

Question 41

Yield

Answer 41

The actual return on a debt security if it is held to maturity.

Question 42

Yield beta

Answer 42

A measure of the sensitivity of a bond’s yield to a general measure of bond yields in the market that is used to refine the hedge ratio.

Question 43

Yield spread

Answer 43

The difference between the yield on a bond and the yield on a default-free security, usually a government note, of the same maturity. The yield spread is primarily determined by the market’s perception of the credit risk on the bond.

Question 44

Yield to maturity

Answer 44

The annual return that an investor earns on a bond if the investor purchases the bond today and holds it until maturity.

Question 45

Zero-cost collar

Answer 45

A transaction in which a position in the underlying is protected by buying a put and selling a call with the premium from the sale of the call offsetting the premium from the purchase of the put. It can also be used to protect a floating-rate borrower against interest rate increases with the premium on a long cap offsetting the premium on a short floor.