CFA III Flashcards
1
Q
Active share
A
A measure of how similar a portfolio is to its benchmark. A manager who precisely replicates the benchmark will have an _____ of zero; a manager with no holdings in common with the benchmark will have an _____ of one.
2
Q
Breadth
A
The number of truly independent decisions made each year.
3
Q
Closet indexer
A
A fund that advertises itself as being actively managed but is substantially similar to an index fund in its exposures.
4
Q
Expected shortfall
A
The average loss conditional on exceeding the VaR cutoff; sometimes referred to asconditional VaRorexpected tail loss.
5
Q
Expected tail loss
A
Expected shortfall: The average loss conditional on exceeding the VaR cutoff; sometimes referred to asconditional VaRor _____.
6
Q
Information coefficient
A
Formally defined as the correlation between forecast return and actual return. In essence, it measures the effectiveness of investment insight.
7
Q
Transfer coefficient
A
The ability to translate portfolio insights into investment decisions without constraint.
8
Q
Portfolio overlay
A
An array of derivative positions managed separately from the securities portfolio to achieve overall intended portfolio characteristics.
9
Q
Back-fill bias
A
The distortion in index or peer group data which results when returns are reported to a database only after they are known to be good returns.
10
Q
Survivorship bias
A
The exclusion of poorly performing or defunct companies from an index or database, biasing the index or database toward financially healthy companies.
11
Q
Unsmoothing
A
An adjustment to the reported return series if serial correlation is detected. Various approaches are available to unsmooth a return series.
12
Q
Home bias
A
13
Q
Shortfall probability
A
The probability of failing to meet a specific liability or goal.
14
Q
Business cycle
A
Fluctuations in GDP in relation to long-term trend growth, usually lasting 9-11 years.
15
Q
Capital market expectations (CME)
A
Expectations concerning the risk and return prospects of asset classes.
16
Q
Cross-sectional consistency
A
17
Q
Diffusion index
A
An index that measures how many indicators are pointing up and how many are pointing down.
18
Q
Econometrics
A
The application of quantitative modeling and analysis grounded in economic theory to the analysis of economic data.
19
Q
Economic indicators
A
Economic statistics provided by government and established private organizations that contain information on an economy’s recent past activity or its current or future position in the business cycle.
20
Q
Input uncertainty
A
Uncertainty concerning whether the inputs are correct.
21
Q
Intertemporal consistency
A
A feature of expectations setting which means that estimates for an asset class over different horizons reflect the same assumptions with respect to the potential paths of returns over time. It is the internal consistency over various time horizons.
22
Q
Leading economic indicators
A
Turning points that usually precede those of the overall economy; they are believed to have value for predicting the economy’s future state, usually near-term.
23
Q
Model uncertainty
A
Uncertainty as to whether a selected model is correct.
24
Q
Nonstationarity
A
A characteristic of series of data whose properties, such as mean and variance, are not constant through time. When analyzing historical data it means that different parts of a data series reflect different underlying statistical properties.
25
Parameter uncertainty
Uncertainty arising because a quantitative model’s parameters are estimated with error.
26
Re-base
With reference to index construction, to change the time period used as the base of the index.
27
Reduced-form models
Models that use economic theory and other factors such as prior research output to describe hypothesized relationships. Can be described as more compact representations of underlying structural models. Evaluate endogenous variables in terms of observable exogenous variables.
28
Regime
The governing set of relationships (between variables) that stem from technological, political, legal, and regulatory environments. Changes in such environments or policy stances can be described as changes in _____.
29
Structural models
Models that specify functional relationships among variables based on economic theory. The functional form and parameters of these models are derived from the underlying theory. They may include unobservable parameters.
30
Taylor rule
A rule linking a central bank’s target short-term interest rate to the rate of growth of the economy and inflation.
31
Total factor productivity
A scale factor that reflects the portion of growth unaccounted for by explicit factor inputs (e.g., capital and labor).
32
Grinold–Kroner model
An expression for the expected return on a share as the sum of an expected income return, an expected nominal earnings growth return, and an expected repricing return.
33
Shrinkage estimation
Estimation that involves taking a weighted average of a historical estimate of a parameter and some other parameter estimate, where the weights reflect the analyst’s relative belief in the estimates.
34
Time-series estimation
Estimators that are based on lagged values of the variable being forecast; often consist of lagged values of other selected variables.
35
Volatility clustering
The tendency for large (small) swings in prices to be followed by large (small) swings of random direction.
36
Liquidity budget
The portfolio allocations (or weightings) considered acceptable for the liquidity categories in the liquidity classification schedule (or time-to-cash table).
37
Liquidity classification schedule
A liquidity management classification (or table) that defines portfolio liquidity “buckets” or categories based on the estimated time necessary to convert assets in that particular category into cash.
38
Time-to-cash table
Liquidity classification schedule: A liquidity management classification (or table) that defines portfolio liquidity “buckets” or categories based on the estimated time necessary to convert assets in that particular category into cash.
39
Base
With respect to a foreign exchange quotation of the price of one unit of a currency, the currency referred to in “one unit of a currency.”
40
Basis risk
The possibility that the expected value of a derivative differs unexpectedly from that of the underlying.
41
Bid price
In a price quotation, the price at which the party making the quotation is willing to buy a specified quantity of an asset or security.
42
Carry trade
A trading strategy that involves buying a security and financing it at a rate that is lower than the yield on that security.
43
Cross hedge
A hedge involving a hedging instrument that is imperfectly correlated with the asset being hedged; an example is hedging a bond investment with futures on a non-identical bond.
44
Currency overlay programs
A currency overlay program is a program to manage a portfolio’s currency exposures for the case in which those exposures are managed separately from the management of the portfolio itself.
45
Delta hedging
Hedging that involves matching the price response of the position being hedged over a narrow range of prices.
46
Domestic asset
An asset that trades in the investor’s domestic currency (or home currency).
47
Domestic currency
The currency of the investor, i.e., the currency in which he or she typically makes consumption purchases, e.g., the Swiss franc for an investor domiciled in Switzerland.
48
Domestic-currency return
A rate of return stated in domestic currency terms from the perspective of the investor; reflects both the foreign-currency return on an asset as well as percentage movement in the spot exchange rate between the domestic and foreign currencies.
49
Dynamic hedge
A hedge requiring adjustment as the price of the hedged asset changes.
50
Foreign assets
Assets denominated in currencies other than the investor’s home currency.
51
Foreign currency
Currency that is not the currency in which an investor makes consumption purchases, e.g., the US dollar from the perspective of a Swiss investor.
52
Foreign-currency return
The return of the foreign asset measured in foreign-currency terms.
53
Forward rate bias
An empirically observed divergence from interest rate parity conditions that active investors seek to benefit from by borrowing in a lower-yield currency and investing in a higher-yield currency.
54
Funding currencies
The low-yield currencies in which borrowing occurs in a carry trade.
55
Hedge ratio
The proportion of an underlying that will offset the risk associated with a derivative position.
56
Home currency
Domestic currency: The currency of the investor, i.e., the currency in which he or she typically makes consumption purchases, e.g., the Swiss franc for an investor domiciled in Switzerland.
57
Intrinsic value
The amount gained (per unit) by an option buyer if an option is exercised at any given point in time. May be referred to as the exercise value of the option.
58
Investment currencies
The high-yielding currencies in a carry trade.
59
Knock-in/knock-out
Features of a vanilla option that is created (or ceases to exist) when the spot exchange rate touches a pre-specified level.
60
Minimum-variance hedge ratio
A mathematical approach to determining the optimal cross hedging ratio.
61
Non-deliverable forwards
Forward contracts that are cash settled (in the non-controlled currency of the currency pair) rather than physically settled (the controlled currency is neither delivered nor received).
62
Offer price
The price at which a counterparty is willing to sell one unit of the base currency.
63
Overbought
When a market has trended too far in one direction and is vulnerable to a trend reversal, or correction.
64
Put spread
A strategy used to reduce the upfront cost of buying a protective put, it involves buying a put option and writing another put option.
64
Oversold
The opposite of overbought; see overbought: When a market has trended too far in one direction and is vulnerable to a trend reversal, or correction.
65
Resistance levels
Price points on dealers’ order boards where one would expect to see a clustering of offers.
66
Seagull spread
An extension of the risk reversal foreign exchange option strategy that limits downside risk.
67
Static hedge
A hedge that is not sensitive to changes in the price of the asset hedged.
68
Stops
Stop-loss orders involve leaving bids or offers away from the current market price to be filled if the market reaches those levels.
69
Strangle
A variation on a straddle in which the put and call have different exercise prices; if the put and call are held long, it is a long _____; if they are held short, it is a short _____.
70
Support levels
Price points on dealers’ order boards where one would expect to see a clustering of bids.
71
Time value
The difference between an option’s premium and its intrinsic value.
72
Asset swap spread (ASW)
The spread over MRR on an interest rate swap for the remaining life of the bond that is equivalent to the bond’s fixed coupon.
73
Asset swaps
Convert a bond’s fixed coupon to MRR plus (or minus) a spread.
74
Authorized participants (APs)
A special group of institutional investors who are authorized by the ETF issuer to participate in the creation/redemption process. APs are large broker/dealers, often market makers.
75
CDS curve
Plot of CDS spreads across maturities for a single reference entity or group of reference entities in an index.
76
Conditional value at risk (CVaR)
Also known as expected loss The average portfolio loss over a specific time period conditional on that loss exceeding the value at risk (VaR) threshold.
77
Credit cycle
The expansion and contraction of credit over the business cycle, which translates into asset price changes based on default and recovery expectations across maturities and rating categories.
78
Credit default swap (CDS) basis
Yield spread on a bond, as compared to CDS spread of same tenor.
79
Credit loss rate
The realized percentage of par value lost to default for a group of bonds equal to the bonds’ default rate multiplied by the loss severity.
80
Credit migration
The change in a bond’s credit rating over a certain period.
81
Credit valuation adjustment (CVA)
The present value of credit risk for a loan, bond, or derivative obligation.
82
Default intensity
POD over a specified time period in a reduced form credit model.
83
Default risk
Credit Risk: The risk that a fixed-income investor may not receive contractual interest and principal cash flows as expected, which is comprised of default risk and loss given default.
84
Discount margin
The discount (or required) margin is the yield spread versus the MRR such that the FRN is priced at par on a rate reset date.
85
Duration Times Spread (DTS)
Weighting of spread duration by credit spread to incorporate the empirical observation that spread changes for lower-rated bonds tend to be consistent on a percentage rather than absolute basis.
86
Empirical duration
The use of statistical methods and historical bond prices to estimate the price–yield relationship for a specific bond or portfolio of bonds.
87
Excess spread
Credit spread return measure that incorporates both changes in spread and expected credit losses for a given period.
88
G-spread
The yield spread in basis points over an actual or interpolated government bond.
89
Green bonds
Innovative financial instruments where the proceeds are invested exclusively (either by specifying the use of the proceeds, direct project exposure or securitization) in green projects that generate climate or other environmental benefits.
90
Hazard rate
The probability that an event will occur, given that it has not already occurred.
91
I-spread (interpolated spread)
Yield spread measure using swaps or constant maturity Treasury YTMs as a benchmark.
92
Incremental VaR (or partial VaR)
The change in the minimum portfolio loss expected to occur over a given time period at a specific confidence level resulting from increasing or decreasing a portfolio position.
93
Loss severity
Portion of a bond’s value (including unpaid interest) an investor loses in the event of default.
94
Matrix pricing (or evaluated pricing)
Methodology for pricing infrequently traded bonds using bonds from similar issuers and actively traded government benchmarks to establish a bond’s fair value.
95
OAS duration
The change in bond price for a given change in OAS.
96
Option-adjusted spread (OAS)
A generalization of the Z-spread yield spread calculation that incorporates bond option pricing based on assumed interest rate volatility.
97
Probability of default
The likelihood that a borrower defaults or fails to meet its obligation to make full and timely payments of principal and interest.
98
Quoted margin
The yield spread over the MRR established upon issuance of an FRN to compensate investors for assuming an issuer’s credit risk.
99
Reduced form credit models
Credit models that solve for default probability over a specific time period using observable company-specific variables such as financial ratios and macroeconomic variables.
100
Relative VaR
Ex ante tracking error
101
Structural credit models
Credit models that apply market-based variables to estimate the value of an issuer’s assets and the volatility of asset value.
102
Value at risk (VaR)
The minimum loss that would be expected a certain percentage of the time over a certain period of time given the assumed market conditions.
103
Yield spread
The simple difference between a bond’s YTM and the YTM of an on-the-run government bond of similar maturity.
104
Z-score
Credit risk model that uses financial ratios and market-based information weighted by coefficients to create a composite score used to classify firms based on the likelihood of financial distress.
105
Zero-discount margin (Z-DM)
A yield spread calculation for FRNs that incorporates forward MRR.
106
Activist short selling
A hedge fund strategy in which the manager takes a short position in a given security and then publicly presents his/her research backing the short thesis.
106
Zero-volatility spread (Z-spread)
Calculates a constant yield spread over a government (or interest rate swap) spot curve.
107
Cross-sectional momentum
A managed futures trend following strategy implemented with a cross-section of assets (within an asset class) by going long those that are rising in price the most and by shorting those that are falling the most. This approach generally results in holding a net zero (market-neutral) position and works well when a market’s out- or underperformance is a reliable predictor of its future performance.
108
Dedicated short-selling
A hedge fund strategy in which the manager takes short-only positions in equities deemed to be expensively priced versus their deteriorating fundamental situations. Short exposures may vary only in terms of portfolio sizing by, at times, holding higher levels of cash.
109
Fulcrum securities
Partially-in-the-money claims (not expected to be repaid in full) whose holders end up owning the reorganized company in a corporate reorganization situation.
110
Fund-of-funds
A fund of hedge funds in which the _____ manager allocates capital to separate, underlying hedge funds (e.g., single manager and/or multi-manager funds) that themselves run a range of different strategies.
111
Hard-catalyst event-driven approach
An event-driven approach in which investments are made in reaction to an already announced corporate event (mergers and acquisitions, bankruptcies, share issuances, buybacks, capital restructurings, re-organizations, accounting changes) in which security prices related to the event have yet to fully converge.
112
Life settlement
The sale of a life insurance contract to a third party. The valuation of a _____ typically requires detailed biometric analysis of the individual policyholder and an understanding of actuarial analysis.
113
Multi-class trading
An equity market-neutral strategy that capitalizes on misalignment in prices and involves buying and selling different classes of shares of the same company, such as voting and non-voting shares.
114
Multi-manager fund
Can be of two types—one is a multi-strategy fund in which teams of portfolio managers trade and invest in multiple different strategies within the same fund; the second type is a fund of hedge funds (or fund-of-funds) in which the manager allocates capital to separate, underlying hedge funds that themselves run a range of different strategies.
115
Multi-strategy fund
A fund in which teams of portfolio managers trade and invest in multiple different strategies within the same fund.
116
Pairs trading
An approach to trading that uses pairs of closely related stocks, buying the relatively undervalued stock and selling short the relatively overvalued stock.
117
Quantitative market-neutral
An approach to building market-neutral portfolios in which large numbers of securities are traded and positions are adjusted on a daily or even an hourly basis using algorithm-based models.
118
Relative value volatility arbitrage
A volatility trading strategy that aims to source and buy cheap volatility and sell more expensive volatility while netting out the time decay aspects normally associated with options portfolios.
119
Short-biased
A hedge fund strategy in which the manager uses a less extreme version of dedicated short-selling. It involves searching for opportunities to sell expensively priced equities, but short exposure may be balanced with some modest value-oriented, or index-oriented, long exposure.
120
Soft-catalyst event-driven approach
An event-driven approach in which investments are made proactively in anticipation of a corporate event (mergers and acquisitions, bankruptcies, share issuances, buybacks, capital restructurings, re-organizations, accounting changes) that has yet to occur.
121
Single-manager fund
A fund in which one portfolio manager or team of portfolio managers invests in one strategy or style.
122
Stub trading
An equity market-neutral strategy that capitalizes on misalignment in prices and entails buying and selling stock of a parent company and its subsidiaries, typically weighted by the percentage ownership of the parent company in the subsidiaries.
123
Time-series momentum
A managed futures trend following strategy in which managers go long assets that are rising in price and go short assets that are falling in price. The manager trades on an absolute basis, so be net long or net short depending on the current price trend of an asset. This approach works best when an asset’s own past returns are a good predictor of its future returns.
124
Capture ratio
A measure of the manager’s gain or loss relative to the gain or loss of the benchmark.
125
Due diligence
Investigation and analysis in support of an investment action, decision, or recommendation.
126
Drawdown duration
The total time from the start of the drawdown until the cumulative drawdown recovers to zero.
127
Holdings-based style analysis
A bottom-up style analysis that estimates the risk exposures from the actual securities held in the portfolio at a point in time.
128
Key person risk
The risk that results from over-reliance on an individual or individuals whose departure would negatively affect an investment manager.
129
Returns-based style analysis
A top-down style analysis that involves estimating the sensitivities of a portfolio to security market indexes.
130
Stop-losses
A trading order that sets a selling price below the current market price with a goal of protecting profits or preventing further losses.
131
Risk premium
An extra return expected by investors for bearing some specified risk.
132
Accounting defeasance
Also called in-substance defeasance, _____ is a way of extinguishing a debt obligation by setting aside sufficient high-quality securities to repay the liability.
132
Cell approach
Stratified samplingA sampling method that guarantees that subpopulations of interest are represented in the sample. Also called representative sampling or _____.
133
Enhanced indexing strategy Method
investors use to match an underlying market index in which the investor purchases fewer securities than the full set of index constituents but matches primary risk factors reflected in the index.
134
Evaluated pricing
Matrix pricing: Process of estimating the market discount rate and price of a bond based on the quoted or flat prices of more frequently traded comparable bonds.
135
Key rate duration
A method of measuring the interest rate sensitivities of a fixed-income instrument or portfolio to shifts in key points along the yield curve.
136
Full replication approach
When every issue in an index is represented in the portfolio, and each portfolio position has approximately the same weight in the fund as in the index.
137
Immunization
An asset/liability management approach that structures investments in bonds to match (offset) liabilities’ weighted-average duration; a type of dedication strategy.
138
Passive investment
A buy and hold approach in which an investor does not make portfolio changes based on short-term expectations of changing market or security performance.
139
Matrix pricing
Process of estimating the market discount rate and price of a bond based on the quoted or flat prices of more frequently traded comparable bonds.
140
Present value of distribution of cash flows methodology
Method used to address a portfolio’s sensitivity to rate changes along the yield curve. This approach seeks to approximate and match the yield curve risk of an index over discrete time periods.
141
Stratified sampling
A sampling method that guarantees that subpopulations of interest are represented in the sample. Also called representative sampling or cell approach.
142
Smart beta
Involves the use of simple, transparent, rules-based strategies as a basis for investment decisions.
143
Total return swap
A swap in which one party agrees to pay the total return on a security. Often used as a credit derivative, in which the underlying is a bond.
143
Bear spread
An option strategy that becomes more valuable when the price of the underlying asset declines, so requires buying one option and writing another with a lower exercise price. A put _____ involves buying a put with a higher exercise price and selling a put with a lower exercise price. A _____ can also be executed with calls.
144
Bull spread
An option strategy that becomes more valuable when the price of the underlying asset rises, so requires buying one option and writing another with a higher exercise price. A call _____ involves buying a call with a lower exercise price and selling a call with a higher exercise price. A _____ can also be executed with puts.
145
Structural risk
Risk that arises from portfolio design, particularly the choice of the portfolio allocations.
146
Surplus
The difference between the value of assets and the present value of liabilities. With respect to an insurance company, the net difference between the total assets and total liabilities (equivalent to policyholders’ _____ for a mutual insurance company and stockholders’ equity for a stock company).
147
Cash-secured put
An option strategy involving the writing of a put option and simultaneously depositing an amount of money equal to the exercise price into a designated account (this strategy is also called a fiduciary put).
148
Collar
An option position in which the investor is long shares of stock and then buys a put with an exercise price below the current stock price and writes a call with an exercise price above the current stock price. Collars allow a shareholder to acquire downside protection through a protective put but reduce the cash outlay by writing a covered call.
149
Calendar spread
A strategy in which one sells an option and buys the same type of option but with different expiration dates, on the same underlying asset and with the same strike. When the investor buys the more distant (near-term) call and sells the near-term (more distant) call, it is a long (short) _____.
150
Covered call
An option strategy in which a long position in an asset is combined with a short position in a call on that asset.
151
Implied volatility
The standard deviation that causes an option pricing model to give the current option price.
152
Delta
The relationship between the option price and the underlying price, which reflects the sensitivity of the price of the option to changes in the price of the underlying. _____ is a good approximation of how an option price will change for a small change in the stock.
153
Gamma
A numerical measure of how sensitive an option’s delta (the sensitivity of the derivative’s price) is to a change in the value of the underlying.
154
Implied volatility surface
A three-dimensional plot, for put and call options on the same underlying asset, of days to expiration (x-axis), option strike prices (y-axis), and implied volatilities (z-axis). It simultaneously shows the volatility skew (or smile) and the term structure of implied volatility.
155
Realized volatility
Historical volatility, the square root of the realized variance of returns, which is a measure of the range of past price outcomes for the underlying asset.
156
Risk reversal
A strategy used to profit from the existence of an implied volatility skew and from changes in its shape over time. A combination of long (short) calls and short (long) puts on the same underlying with the same expiration is a long (short) _____.
157
Synthetic long forward position
The combination of a long call and a short put with identical strike price and expiration, traded at the same time on the same underlying.
157
Straddle
An option combination in which one buys both puts and calls, with the same exercise price and same expiration date, on the same underlying asset. In contrast to this long _____, if someone writes both options, it is a short _____.
158
Position delta
The overall or portfolio delta. For example, the _____ of a covered call, consisting of long 100 shares and short one at-the-money call, is +50 (= +100 for the shares and -50 for the short ATM call).
159
Protective put
A strategy of purchasing an underlying asset and purchasing a put on the same asset.
160
Theta
The change in a derivative instrument for a given small change in calendar time, holding everything else constant. Specifically, the _____ calculation assumes nothing changes except calendar time. _____ also reflects the rate at which an option’s time value decays.
161
Vega
The change in a given derivative instrument for a given small change in volatility, holding everything else constant. A sensitivity measure for options that reflects the effect of volatility.
162
Volatility skew
The skewed plot (of implied volatility (y-axis) against strike price (x-axis) for options on the same underlying with the same expiration) that occurs when the implied volatility increases for OTM puts and decreases for OTM calls, as the strike price moves away from the current price.
163
Synthetic short forward position
The combination of a short call and a long put at the same strike price and maturity (traded at the same time on the same underlying).
163
Term structure of volatility
The plot of implied volatility (y-axis) against option maturity (x-axis) for options with the same strike price on the same underlying. Typically, implied volatility is not constant across different maturities − rather, it is often in contango, meaning that the implied volatilities for longer-term options are higher than for near-term ones.
164
Active management
A portfolio management approach that allows risk factor mismatches relative to a benchmark index causing potentially significant return differences between the active portfolio and the underlying benchmark.
164
Volatility smile
The U-shaped plot (of implied volatility (y-axis) against strike price (x-axis) for options on the same underlying with the same expiration) that occurs when the implied volatilities priced into both OTM puts and calls trade at a premium to implied volatilities of ATM options.
165
Active risk
The standard deviation of active returns.
166
Cash flow matching
Immunization approach that attempts to ensure that all future liability payouts are matched precisely by cash flows from bonds or fixed-income derivatives.
167
Contingent immunization
Hybrid approach that combines immunization with an active management approach when the asset portfolio’s value exceeds the present value of the liability portfolio.
168
Active return
The return on a portfolio minus the return on the portfolio’s benchmark.
169
Duration matching
Immunization approach based on the duration of assets and liabilities. Ideally, the liabilities being matched (the liability portfolio) and the portfolio of assets (the bond portfolio) should be affected similarly by a change in interest rates.
169
Repo rate
The interest rate on a repurchase agreement.
170
Repurchase agreements
In _____, or repos, a security owner agrees to sell a security for a specific cash amount while simultaneously agreeing to repurchase the security at a specified future date (typically one day later) and price.
171
Enhanced indexing approach
Maintains a close link to the benchmark but attempts to generate a modest amount of outperformance relative to the benchmark.
171
Liability-based mandates
Mandates managed to match or cover expected liability payments (future cash outflows) with future projected cash inflows.
172
Pure indexing
Attempts to replicate a bond index as closely as possible, targeting zero active return and zero active risk.
173
Rebate rate
The portion of the collateral earnings rate that is repaid to the security borrower by the security lender.
174
Relative value
A concept that describes the selection of the most attractive individual securities to populate the portfolio with, using ranking and comparing.
175
Asset-only
With respect to asset allocation, an approach that focuses directly on the characteristics of the assets without explicitly modeling the liabilities.
175
Calendar rebalancing
Rebalancing a portfolio to target weights on a periodic basis; for example, monthly, quarterly, semiannually, or annually.
176
Decision-reversal risk
The risk of reversing a chosen course of action at the point of maximum loss.
177
Dynamic asset allocation
_____ is an investment strategy premised on long-term asset allocation but employing short-term, tactical trading to maintain investment allocation targets.
178
Reverse repos
Repurchase agreements from the standpoint of the lender.
179
Spread duration
The change in bond price for a given change in yield spread. Also referred to as OAS duration when the option-adjusted spread (OAS) is the yield measure used.
179
Total return payer
Party responsible for paying the reference obligation cash flows and return to the receiver but that is also compensated by the receiver for any depreciation in the index or default losses incurred by the portfolio.
180
Total return receiver
Receives both the cash flows from the underlying index and any appreciation in the index over the period in exchange for paying the MRR plus a predetermined spread.
180
Tracking error
The standard deviation of the differences between a portfolio’s returns and its benchmark’s returns; a synonym of active risk. Also called tracking risk.
181
Tracking risk
The standard deviation of the differences between a portfolio’s returns and its benchmarks returns. Also called tracking error.
182
Active risk budgeting
Risk budgeting that concerns active risk (risk relative to a portfolio’s benchmark).
183
Goals-based
With respect to asset allocation or investing, an approach that focuses on achieving an investor’s goals (for example, related to supporting lifestyle needs or aspirations) based typically on constructing sub-portfolios aligned with those goals.
184
Economic balance sheet
A balance sheet that provides an individual’s total wealth portfolio, supplementing traditional balance sheet assets with human capital and pension wealth, and expanding liabilities to include consumption and bequest goals. Also known as holistic balance sheet.
185
Extended portfolio assets and liabilities
Assets and liabilities beyond those shown on a conventional balance sheet that are relevant in making asset allocation decisions; an example of an extended asset is human capital.
186
Goals-based investing
An investment industry term for approaches to investing for individuals and families focused on aligning investments with goals (parallel to liability-driven investing for institutional investors).
186
Liability-relative
With respect to asset allocation, an approach that focuses directly only on funding liabilities as an investment objective.
187
Passive management
A buy-and-hold approach to investing in which an investor does not make portfolio changes based upon short-term expectations of changing market or security performance.
187
Percent-range rebalancing
An approach to rebalancing that involves setting rebalancing thresholds or trigger points, stated as a percentage of the portfolio’s value, around target values.
188
Home-country bias
The favoring of domestic over non-domestic investments relative to global market value weights.
188
Liability glide path
A specification of desired proportions of liability-hedging assets and return-seeking assets and the duration of the liability hedge as funded status changes and contributions are made.
189
Liability-driven investing
An investment industry term that generally encompasses asset allocation that is focused on funding an investor’s liabilities in institutional contexts.
190
High-water mark
The highest value, net of fees, that a fund has reached in history. It reflects the highest cumulative return used to calculate an incentive fee.
191
Impact investing
_____ refers to investments made with the specific intent of generating positive, measurable social and environmental impact alongside a financial return (which differentiates it from philanthropy).
191
Negative screening
An ESG investment style that focuses on the exclusion of certain sectors, companies, or practices in a fund or portfolio on the basis of specific ESG criteria.
192
Rebalancing
In the context of asset allocation, a discipline for adjusting the portfolio to align with the strategic asset allocation.
193
Rebalancing range
A range of values for asset class weights defined by trigger points above and below target weights, such that if the portfolio value passes through a trigger point, rebalancing occurs. Also known as a corridor.
194
Risk budgeting
The establishment of objectives for individuals, groups, or divisions of an organization that takes into account the allocation of an acceptable level of risk.
195
Tactical asset allocation
Asset allocation that involves making short-term adjustments to asset class weights based on short-term predictions of relative performance among asset classes.
195
Trigger points
In the context of portfolio rebalancing, the endpoints of a rebalancing range (corridor).
196
Best-in-class
An ESG implementation approach that seeks to identify the most favorable companies and sectors based on ESG considerations. Also called positive screening.
196
Dividend capture
A trading strategy whereby an equity portfolio manager purchases stocks just before their ex-dividend dates, holds these stocks through the ex-dividend date to earn the right to receive the dividend, and subsequently sells the shares.
197
Longevity risk
The risk of outliving one’s financial resources.
198
Mortality table
A table that indicates individual life expectancies at specified ages.
199
Optional stock dividends
A type of dividend in which shareholders may elect to receive either cash or new shares.
199
Positive screening
An ESG implementation approach that seeks to identify the most favorable companies and sectors based on ESG considerations. Also called best-in-class.
200
Securities lending
A form of collateralized lending that may be used to generate income for portfolios.
200
Special dividends
A dividend paid by a company that does not pay dividends on a regular schedule, or a dividend that supplements regular cash dividends with an extra payment.
201
Stock lending
Securities lending involving the transfer of equities.
201
Thematic investing
An investment approach that focuses on companies within a specific sector or following a specific theme, such as energy efficiency or climate change.
202
Asset location
The type of account an asset is held within, e.g., taxable or tax deferred.
203
Capital sufficiency analysis
The process by which a wealth manager determines whether a client has, or is likely to accumulate, sufficient financial resources to meet his or her objectives; also known as capital needs analysis.
204
Capital needs analysis
Capital Sufficiency Analysis: The process by which a wealth manager determines whether a client has, or is likely to accumulate, sufficient financial resources to meet his or her objectives; also known as capital needs analysis.
205
Deferred annuity
An annuity that enables an individual to purchase an income stream that will begin at a later date.
205
Financial capital
The tangible and intangible assets (excluding human capital) owned by an individual or household.
206
Human capital
An implied asset; the net present value of an investor’s future expected labor income weighted by the probability of surviving to each future age. Also called net employment capital.
206
Immediate annuity
An annuity that provides a guarantee of specified future monthly payments over a specified period of time.
207
Investment policy statement
A written planning document that describes a client’s investment objectives and risk tolerance over a relevant time horizon, along with the constraints that apply to the client’s portfolio.
208
Risk perception
The subjective assessment of the risk involved in the outcome of an investment decision.
209
Risk tolerance
The amount of risk an investor is willing and able to bear to achieve an investment goal.
210
Buffering
Establishing ranges around breakpoints that define whether a stock belongs in one index or another.
210
Cash drag
Tracking error caused by temporarily uninvested cash.
211
Completion overlay
A type of overlay that addresses an indexed portfolio that has diverged from its proper exposure.
211
Currency overlay
A type of overlay that helps hedge the returns of securities held in foreign currency back to the home country’s currency.
212
Overlay
A derivative position (or positions) used to adjust a pre-existing portfolio closer to its objectives.
212
Exhaustive
An index construction strategy that selects every constituent of a universe.
213
Risk capacity
The ability to accept financial risk.
214
Risk aversion
The degree of an investor’s unwillingness to take risk; the inverse of risk tolerance.
215
Canada model
Characterized by a high allocation to alternatives. Unlike the endowment model, however, the _____ relies more on internally managed assets. The innovative features of the _____ are the: a) reference portfolio, b) total portfolio approach, and c) active management.
215
Decumulation phase
Phase where the government predominantly withdraws from a sovereign wealth pension reserve fund.
216
Packeting
Splitting stock positions into multiple parts.
216
Program trading
A strategy of buying or selling many stocks simultaneously.
217
Rebalancing overlay
A type of overlay that addresses a portfolio’s need to sell certain constituent securities and buy others.
218
Selective
An index construction methodology that targets only those securities with certain characteristics.
219
Time deposits
Interest-bearing accounts that have a specified maturity date. This category includes savings accounts and certificates of deposit (CDs).
219
Term deposits
Interest-bearing accounts that have a specified maturity date. This category includes savings accounts and certificates of deposit (CDs).
220
Vesting
A term indicating that employees only become eligible to receive a pension after meeting certain criteria, typically a minimum number of years of service.
220
Absolute return benchmark
A minimum target return that an investment manager is expected to beat.
221
Accumulation phase
Phase where the government predominantly contributes to a sovereign wealth pension reserve fund.
222
Defined benefit
A retirement plan in which a plan sponsor commits to paying a specified retirement benefit.
222
Defined contribution
A retirement plan in which contributions are defined but the ultimate retirement benefit is not specified or guaranteed by the plan sponsor.
223
Demand deposits
Accounts that can be drawn upon regularly and without notice. This category includes checking accounts and certain savings accounts that are often accessible through online banks or automated teller machines (ATMs).
224
Endowment model
Characterized by a high allocation to alternative investments (private investments and hedge funds), significant active management, and externally managed assets.
225
General account
Account holding assets to fund future liabilities from traditional life insurance and fixed annuities, the products in which the insurer bears all the risks—particularly mortality risk and longevity risk.
226
Liability driven investing (LDI) model
In the _________, the primary investment objective is to generate returns sufficient to cover liabilities, with a focus on maximizing expected surplus return (excess return of assets over liabilities) and managing surplus volatility.
226
Limited-life foundations
A type of foundation where founders seek to maintain control of spending while they (or their immediate heirs) are still alive.
227
Mission-related investing
Aims to direct a significant portion of assets in excess of annual grants into projects promoting a foundation’s mission.
227
Norway model
Characterized by an almost exclusive reliance on public equities and fixed income (the traditional 60/40 equity/bond model falls under the _____), with largely passively managed assets and with very little to no allocation to alternative investments.
228
Participant-switching life-cycle options
Automatically switch DC plan members into a more conservative asset mix as their age increases. There may be several automatic de-risking switches at different age targets.
228
Participant/cohort option
Pools the DC plan member with a cohort that has a similar target retirement date.
229
Reserve portfolio
The component of an insurer’s general account that is subject to specific regulatory requirements and is intended to ensure the company’s ability to meet its policy liabilities. The assets in the _____ are managed conservatively and must be highly liquid and low risk.
229
Separate accounts
Accounts holding assets to fund future liabilities from variable life insurance and variable annuities, the products in which customers make investment decisions from a menu of options and themselves bear investment risk.
230
Surplus portfolio
The component of an insurer’s general account that is intended to realize higher expected returns than the reserve portfolio and so can assume some liquidity risk. _____ assets are often managed aggressively with exposure to alternative assets.
231
Life-cycle finance
A concept in finance that recognizes as an investor ages, the fundamental nature of wealth and risk evolves.
231
Permanent life insurance
A type of life insurance that provides lifetime coverage.
232
Property insurance
A type of insurance used by individuals to manage property risk.
232
Premature death risk
The risk of an individual dying earlier than anticipated; sometimes referred to as mortality risk.
233
Property risk
The possibility that a person’s property may be damaged, destroyed, stolen, or lost.
234
Arithmetic attribution
An attribution approach which explains the arithmetic difference between the portfolio return and its benchmark return. The single-period attribution effects sum to the excess return, however, when combining multiple periods, the sub-period attribution effects will not sum to the excess return.
234
Carhart model
A four factor model used in performance attribution. The four factors are: market (RMRF), size (SMB), value (HML), and momentum (WML).
235
Custom security-based benchmark
Benchmark that is custom built to accurately reflect the investment discipline of a particular investment manager. Also called a strategy benchmark because it reflects a manager’s particular strategy.
236
Drawdown
A percentage peak-to-trough reduction in net asset value.
237
Excess return
Used in various senses appropriate to context: 1) The difference between the portfolio return and the benchmark return; 2) The return in excess of the risk-free rate.
238
Factor-model-based benchmarks
Benchmarks constructed by examining a portfolio’s sensitivity to a set of factors, such as the return for a broad market index, company earnings growth, industry, or financial leverage.
239
Holdings-based attribution
A “buy and hold” attribution approach which calculates the return of portfolio and benchmark components based upon the price and foreign exchange rate changes applied to daily snapshots of portfolio holdings.
240
Interaction effect
The attribution effect resulting from the interaction of the allocation and selection decisions.
241
Macro attribution
Attribution at the sponsor level.
241
Manager peer group
Manager universeA broad group of managers with similar investment disciplines. Also called _____.
242
Investment style
A natural grouping of investment disciplines that has some predictive power in explaining the future dispersion of returns across portfolios.
243
Manager universe
A broad group of managers with similar investment disciplines. Also called manager peer group.
243
Micro attribution
Attribution at the portfolio manager level.
244
Performance attribution
Attribution, including return attribution and risk attribution; often used as a synonym for return attribution.
244
Return attribution
A set of techniques used to identify the sources of the excess return of a portfolio against its benchmark.
245
Returns-based attribution
An attribution approach that uses only the total portfolio returns over a period to identify the components of the investment process that have generated the returns. The Brinson–Hood–Beebower approach is a _____ approach.
246
Returns-based benchmarks
Benchmarks constructed by examining a portfolio’s sensitivity to a set of factors, such as the returns for various style indexes (e.g., small-cap value, small-cap growth, large-cap value, and large-cap growth).
247
Risk attribution
The analysis of the sources of risk.
247
Sharpe ratio
The average return in excess of the risk-free rate divided by the standard deviation of return; a measure of the average excess return earned per unit of standard deviation of return.
248
Transactions-based attribution
An attribution approach that captures the impact of intra-day trades and exogenous events such as a significant class action settlement.
249
Disability income insurance
A type of insurance designed to mitigate earnings risk as a result of a disability in which an individual becomes less than fully employed.
249
Earnings risk
The risk associated with the earning potential of an individual.
250
Health insurance
A type of insurance used to cover health care and medical costs.
250
Economic net worth
The difference between an individual’s assets and liabilities; extends traditional financial assets and liabilities to include human capital and future consumption needs.
251
Health risk
The risk associated with illness or injury.
252
Holistic balance sheet
Economic balance sheetA balance sheet that provides an individual’s total wealth portfolio, supplementing traditional balance sheet assets with human capital and pension wealth, and expanding liabilities to include consumption and bequest goals. Also known as _____.
253
Liability insurance
A type of insurance used to manage liability risk.
254
Liability risk
The possibility that an individual or household may be held legally liable for the financial costs associated with property damage or physical injury.
254
Life insurance
A type of insurance that protects against the loss of human capital for those who depend on an individual’s future earnings.
255
Controlled foreign corporation (CFC)
A company located outside a taxpayer’s home country in which the taxpayer has a controlling interest as defined under the home country law.
256
Discretionary trust
A trust that enables the trustee to determine whether and how much to distribute based on a beneficiary’s general welfare.
257
Double taxation
A term used to describe situations in which income is taxed twice. For example, when corporate earnings are taxed at the company level and then that portion of earnings paid as dividends is taxed again at the investor level.
258
Temporary life insurance
A type of life insurance that covers a certain period of time, specified at purchase. Commonly referred to as “term” life insurance.
258
Cross-currency basis swap
A swap in which notional principals are exchanged because the goal of the transaction is to issue at a more favorable funding rate and swap the amount back to the currency of choice.
259
Effective federal funds (FFE) rate
The fed funds rate actually transacted between depository institutions, not the Fed’s target federal funds rate.
259
Variance notional
The notional amount of a variance swap; it equals vega notional divided by two times the volatility strike price [i.e., (vega notional)/(2 × volatility strike)].
260
Vega notional
The trade size for a variance swap, which represents the average profit and loss of the variance swap for a 1% change in volatility from the strike.
260
After-tax excess return
Calculated as the after-tax return of the portfolio minus the after-tax return of the associated benchmark portfolio.
261
Bequest
The transferring, or bequeathing, of assets in some other way upon a person’s death. Also referred to as a testamentary _____ or testamentary gratuitous transfer.
262
Capital gain or loss
For tax purposes equals the selling price (net of commissions and other trading costs) of the asset less its tax basis.
262
Charitable gratuitous transfers
Asset transfers to not-for-profit or charitable organizations. In most jurisdictions charitable donations are not subject to a gift tax and most jurisdictions permit income tax deductions for charitable donations.
263
Completion portfolio
__________Is an index-based portfolio that when added to a given concentrated asset position creates an overall portfolio with exposures similar to the investor’s benchmark.
263
Charitable remainder trust
A trust setup to provide income for the life of named-beneficiaries. When the last named-beneficiary dies any remaining assets in this trust are distributed to the charity named in the trust, hence the term charitable remainder trust.
264
Equity monetization
A group of strategies that allow investors to receive cash for their concentrated stock positions without an outright sale. These transactions are structured to avoid triggering the capital gains tax.
265
Estate
Consists of all of the property a person owns or controls, which may consist of financial assets (e.g., bank accounts, stocks, bonds, business interests), tangible personal assets (e.g., artwork, collectibles, vehicles), immovable property (e.g., residential real _____, timber rights), and intellectual property (e.g., royalties).
266
Estate planning
The process of preparing for the disposition of one’s estate upon death and during one’s lifetime.
266
Estate tax
Levied on the total value of a deceased person’s assets and paid out of the estate before any distributions to beneficiaries.
267
Exchange fund
A partnership in which each of the partners have each contributed low cost-basis stock to the fund. Used in the United Sates as a mechanism to achieve a tax-free exchange of a concentrated asset position.
268
Family constitution
Typically a non-binding document that sets forth an agreed-upon set of rights, values, and responsibilities of the family members and other stakeholders. Used by many wealth- and business-owning families as the starting point of conflict resolution procedures.
269
Family governance
The process for a family’s collective communication and decision making designed to serve current and future generations based on the common values of the family.
270
Fixed trust
Distributions to beneficiaries of a _____ are specified in the trust document to occur at certain times or in certain amounts.
271
Forced heirship
Is the requirement that a certain proportion of assets must pass to specified family members, such as a spouse and children.
272
Foundation
A legal entity available in certain jurisdictions. Foundations are typically set up to hold assets for a specific charitable purpose, such as to promote education or for philanthropy. When set up and funded by an individual or family and managed by its own directors, it is called a private _____. The term family _____ usually refers to a private _____ where donors or members of the donors’ family are actively involved.
273
Generation-skipping tax
Taxes levied in some jurisdictions on asset transfers (gifts) that skip one generation such as when a grandparent transfers asset s to their grandchildren. (see related Gift Tax).
274
Gift tax
Depending on the tax laws of the country, assets gifted by one person to another during the giftor’s lifetime may be subject to a _____.
275
Intestate
A person who dies without a valid will or with a will that does not dispose of their property are considered to have died _____.
275
Inheritance tax
Paid by each individual beneficiary of a deceased person’s estate on the value of the benefit the individual received from the estate.
276
Irrevocable trust
The person whose assets are used to create the trust gives up the right to rescind the trust relationship and regain title to the trust assets.
277
Post-liquidation return
Calculates the return assuming that all portfolio holdings are sold as of the end date of the analysis and that the resulting capital gains tax that would be due is deducted from the ending portfolio value.
277
Potential capital gain exposure (PCGE)
Is an estimate of the percentage of a fund’s assets that represents gains and measures how much the fund’s assets have appreciated. It can be an indicator of possible future capital gain distributions.
278
Progressive tax rate schedule
A tax regime in which the tax rate increases as the amount of income or wealth being taxed increases.
278
Probate
The legal process to confirm the validity of the will so that executors, heirs, and other interested parties can rely on its authenticity.
278
Qualified dividends
Generally dividends from shares in domestic corporations and certain qualified foreign corporations which have been held for at least a specified minimum period of time.
279
Revocable trust
The person whose assets are used to create the trust retains the right to rescind the trust relationship and regain title to the trust assets.
279
Staged diversification strategy
The simplest approach to managing the risk of a concentrated position involves selling the concentrated position over some period of time, paying associated tax, and reinvesting the proceeds in a diversified portfolio.
280
Tax alpha
Calculated by subtracting the pre-tax excess return from the after-tax excess return, the _____ isolates the benefit of tax management of the portfolio.
280
Tax avoidance
The legal activity of understanding the tax laws and finding approaches that avoid or minimize taxation.
281
Tax basis
In many cases, the _____ is the amount that was paid to acquire an asset, or its ‘cost’ basis, and serves as the foundation for calculating a capital gain or loss.
282
Tax-deferred account
An account where investments and contributions may be made on a pre-tax basis and investment returns accumulate on a tax-deferred basis until funds are withdrawn, at which time they are taxed at ordinary income tax rates.
282
Tax-efficiency ratio (TER)
Is calculated as the after-tax return divided by the pre-tax return. It is used to understand if a fund is appropriate for the taxable account of a client.
283
Tax-efficient strategy
An investment strategy that is designed to give up very little of its return to taxes.
283
Tax-efficient decumulation strategy
Is the process of taking into account the tax considerations involved in deploying retirement assets to support spending needs over a client’s remaining lifetime during retirement.
283
Tax-exempt account
An account on which no taxes are assessed during the investment, contribution, or withdrawal phase, nor are they assessed on investment returns.
284
Taxable account
An account on which the normal tax rules of the jurisdiction apply to investments and contributions.
285
Tax evasion
The illegal concealment and non-payment of taxes that are otherwise due.
285
Tax haven
A country or independent area with no or very low tax rates for foreign investors.
286
Tax loss harvesting
Selling securities at a loss to offset a realized capital gain or other income. The rules for what can be done vary by jurisdiction.
287
Tax lot accounting
Important in tax loss harvesting strategies to identify the cost of securities sold from a portfolio that has been built up over time with purchases and sales over time. _____ keeps track of how much was paid for an investment and when it was purchased for the portfolio. Not allowed in all jurisdictions.
288
Territorial tax systems
Jurisdictions operate where only locally-sourced income is taxed.
288
Testamentary bequest
Bequest: The transferring, or bequeathing, of assets in some other way upon a person’s death. Also referred to as a _____ or testamentary gratuitous transfer.
289
Testamentary gratuitous transfer
Bequest: The transferring, or bequeathing, of assets in some other way upon a person’s death. Also referred to as a testamentary bequest or _____.
290
Decision price
In a trading context, the _____ is the security price at the time the investment decision was made.
290
Delay cost
The (trading related) cost associated with not submitting the order to the market in a timely manner.
291
Direct market access (DMA)
Access in which market participants can transact orders directly with the order book of an exchange using a broker's exchange connectivity.
291
Execution cost
The difference between the (trading related) cost of the real portfolio and the paper portfolio, based on shares and prices transacted.
292
Testator
The person who authored the will and whose property is disposed of according to the will.
292
Trust
A legal is a vehicle through which an individual (called a settlor) entrusts certain assets to a trustee (or trustees) who manages the assets for the benefit of assigned beneficiaries. A _____ may be either a testamentary _____—a _____ created through the testator’s will—or a living or inter-vivos _____—a _____ created during the settlor’s lifetime.
292
Will (or Testament)
A document that outlines the rights others will have over one’s property after death.
293
Withholding taxes
Taxes imposed on income in the country in which an investment is made without regard for offsetting investment expenses or losses that may be available from the taxpayer’s other investment activities.
294
Worldwide tax system
Jurisdictions that tax all income regardless of its source.
295
Agency trade
A trade in which the broker is engaged to find the other side of the trade, acting as an agent. In doing so, the broker does not assume any risk for the trade.
296
Alpha decay
In a trading context, _____ is the erosion or deterioration in short term alpha after the investment decision has been made.
297
Alternative trading systems (ATS)
Non-exchange trading venues that bring together buyers and sellers to find transaction counterparties. Also called multilateral trading facilities (MTF).
297
Arrival price
In a trading context, the _____ is the security price at the time the order was released to the market for execution.
298
Implementation shortfall (IS)
The difference between the return for a notional or paper portfolio, where all transactions are assumed to take place at the manager’s decision price, and the portfolio’s actual return, which reflects realized transactions, including all fees and costs.
299
Multilateral trading facilities
Non-exchange trading venues that bring together buyers and sellers to find transaction counterparties. Also called multilateral trading facilities (MTF).
299
Opportunity cost
Reflects the foregone opportunity of investing in a different asset. It is typically denoted by the risk-free rate of interest, r.
300
Principal trade
A trade in which the market maker or dealer becomes a disclosed counterparty and assumes risk for the trade by transacting the security for their own account. Also called broker risk trades.
301
Request for quote (RFQ)
A non-binding quote provided by a market maker or dealer to a potential buyer or seller upon request. Commonly used in fixed income markets these quotes are only valid at the time they are provided.
302
Smart order routers (SOR)
Smart systems used to electronically route small orders to the best markets for execution based on order type and prevailing market conditions.
303
Covered interest rate parity
The relationship among the spot exchange rate, the forward exchange rate, and the interest rates in two currencies that ensures that the return on a hedged (i.e., covered) foreign risk-free investment is the same as the return on a domestic risk-free investment. Also called interest rate parity.
304
Trade urgency
A reference to how quickly or slowly an order is executed over the trading time horizon.
305
Barbell
A fixed-income investment strategy combining short- and long-term bond positions.
305
Bear flattening
A decrease in the yield spread between long- and short-term maturities across the yield curve, which is largely driven by a rise in short-term bond yields-to-maturity.
306
Bear steepening
An increase in the yield spread between long- and short-term maturities across the yield curve, which is largely driven by a rise in long-term bond yields-to-maturity.
307
Bull flattening
A decrease in the yield spread between long- and short-term maturities across the yield curve, which is largely driven by a decline in long-term bond yields-to-maturity.
307
Bull steepening
An increase in the yield spread between long- and short-term maturities across the yield curve, which is largely driven by a decline in short-term bond yields-to-maturity.
307
Bullet
A fixed-income investment strategy that focuses on the intermediate term (or “belly”) of the yield curve.
308
Butterfly spread
A measure of yield curve shape or curvature equal to double the intermediate yield-to-maturity less the sum of short- and long-term yields-to-maturity.
309
Butterfly strategy
A common yield curve shape strategy that combines a long or short bullet position with a barbell portfolio in the opposite direction to capitalize on expected yield curve shape changes.
309
Carry trade across currencies
A strategy seeking to benefit from a positive interest rate differential across currencies by combining a short position (or borrowing) in a low-yielding currency and a long position (or lending) in a high-yielding currency.
310
Negative butterfly
An increase in the butterfly spread due to lower short- and long-term yields-to-maturity and a higher intermediate yield-to-maturity.
310
Options on bond futures contracts
Instruments that involve the right, but not the obligation, to enter into a bond futures contract at a pre-determined strike (bond price) on a future date in exchange for an up-front premium.
311
Positive butterfly
A decrease in the butterfly spread due to higher short- and long-term yields-to-maturity and a lower intermediate yield-to-maturity.
311
Scenario analysis
A technique for exploring the performance and risk of investment strategies in different structural regimes.
312
Swaption
This instrument grants a party the right, but not the obligation, to enter into an interest rate swap at a pre-determined strike (fixed swap rate) on a future date in exchange for an up-front premium.
313
Uncovered interest rate parity
The proposition that the expected return on an uncovered (i.e., unhedged) foreign currency (risk-free) investment should equal the return on a comparable domestic currency investment.
313
Credit Risk
The risk that a fixed-income investor may not receive contractual interest and principal cash flows as expected, which is comprised of default risk and loss given default.
