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CFA III Flashcards

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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.

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2
Q

Breadth

A

The number of truly independent decisions made each year.

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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.

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4
Q

Expected shortfall

A

The average loss conditional on exceeding the VaR cutoff; sometimes referred to asconditional VaRorexpected tail loss.

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5
Q

Expected tail loss

A

Expected shortfall: The average loss conditional on exceeding the VaR cutoff; sometimes referred to asconditional VaRor _____.

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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.

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7
Q

Transfer coefficient

A

The ability to translate portfolio insights into investment decisions without constraint.

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8
Q

Portfolio overlay

A

An array of derivative positions managed separately from the securities portfolio to achieve overall intended portfolio characteristics.

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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.

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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.

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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.

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12
Q

Home bias

A
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13
Q

Shortfall probability

A

The probability of failing to meet a specific liability or goal.

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14
Q

Business cycle

A

Fluctuations in GDP in relation to long-term trend growth, usually lasting 9-11 years.

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15
Q

Capital market expectations (CME)

A

Expectations concerning the risk and return prospects of asset classes.

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16
Q

Cross-sectional consistency

A
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17
Q

Diffusion index

A

An index that measures how many indicators are pointing up and how many are pointing down.

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18
Q

Econometrics

A

The application of quantitative modeling and analysis grounded in economic theory to the analysis of economic data.

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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.

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20
Q

Input uncertainty

A

Uncertainty concerning whether the inputs are correct.

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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.

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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.

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23
Q

Model uncertainty

A

Uncertainty as to whether a selected model is correct.

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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.

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25
Q

Parameter uncertainty

A

Uncertainty arising because a quantitative model’s parameters are estimated with error.

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26
Q

Re-base

A

With reference to index construction, to change the time period used as the base of the index.

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27
Q

Reduced-form models

A

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.

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28
Q

Regime

A

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 _____.

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29
Q

Structural models

A

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.

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30
Q

Taylor rule

A

A rule linking a central bank’s target short-term interest rate to the rate of growth of the economy and inflation.

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31
Q

Total factor productivity

A

A scale factor that reflects the portion of growth unaccounted for by explicit factor inputs (e.g., capital and labor).

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32
Q

Grinold–Kroner model

A

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.

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33
Q

Shrinkage estimation

A

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.

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34
Q

Time-series estimation

A

Estimators that are based on lagged values of the variable being forecast; often consist of lagged values of other selected variables.

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35
Q

Volatility clustering

A

The tendency for large (small) swings in prices to be followed by large (small) swings of random direction.

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36
Q

Liquidity budget

A

The portfolio allocations (or weightings) considered acceptable for the liquidity categories in the liquidity classification schedule (or time-to-cash table).

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37
Q

Liquidity classification schedule

A

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.

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38
Q

Time-to-cash table

A

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.

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39
Q

Base

A

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.”

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40
Q

Basis risk

A

The possibility that the expected value of a derivative differs unexpectedly from that of the underlying.

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41
Q

Bid price

A

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.

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42
Q

Carry trade

A

A trading strategy that involves buying a security and financing it at a rate that is lower than the yield on that security.

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43
Q

Cross hedge

A

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.

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44
Q

Currency overlay programs

A

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.

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45
Q

Delta hedging

A

Hedging that involves matching the price response of the position being hedged over a narrow range of prices.

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46
Q

Domestic asset

A

An asset that trades in the investor’s domestic currency (or home currency).

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47
Q

Domestic currency

A

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.

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48
Q

Domestic-currency return

A

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.

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49
Q

Dynamic hedge

A

A hedge requiring adjustment as the price of the hedged asset changes.

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50
Q

Foreign assets

A

Assets denominated in currencies other than the investor’s home currency.

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51
Q

Foreign currency

A

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.

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52
Q

Foreign-currency return

A

The return of the foreign asset measured in foreign-currency terms.

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53
Q

Forward rate bias

A

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.

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54
Q

Funding currencies

A

The low-yield currencies in which borrowing occurs in a carry trade.

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55
Q

Hedge ratio

A

The proportion of an underlying that will offset the risk associated with a derivative position.

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56
Q

Home currency

A

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.

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57
Q

Intrinsic value

A

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.

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58
Q

Investment currencies

A

The high-yielding currencies in a carry trade.

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59
Q

Knock-in/knock-out

A

Features of a vanilla option that is created (or ceases to exist) when the spot exchange rate touches a pre-specified level.

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60
Q

Minimum-variance hedge ratio

A

A mathematical approach to determining the optimal cross hedging ratio.

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61
Q

Non-deliverable forwards

A

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).

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62
Q

Offer price

A

The price at which a counterparty is willing to sell one unit of the base currency.

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63
Q

Overbought

A

When a market has trended too far in one direction and is vulnerable to a trend reversal, or correction.

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64
Q

Put spread

A

A strategy used to reduce the upfront cost of buying a protective put, it involves buying a put option and writing another put option.

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64
Q

Oversold

A

The opposite of overbought; seeoverbought:When a market has trended too far in one direction and is vulnerable to a trend reversal, or correction.

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65
Q

Resistance levels

A

Price points on dealers’ order boards where one would expect to see a clustering of offers.

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66
Q

Seagull spread

A

An extension of the risk reversal foreign exchange option strategy that limits downside risk.

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67
Q

Static hedge

A

A hedge that is not sensitive to changes in the price of the asset hedged.

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68
Q

Stops

A

Stop-loss orders involve leaving bids or offers away from the current market price to be filled if the market reaches those levels.

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69
Q

Strangle

A

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 _____.

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70
Q

Support levels

A

Price points on dealers’ order boards where one would expect to see a clustering of bids.

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71
Q

Time value

A

The difference between an option’s premium and its intrinsic value.

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72
Q

Asset swap spread (ASW)

A

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.

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73
Q

Asset swaps

A

Convert a bond’s fixed coupon to MRR plus (or minus) a spread.

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74
Q

Authorized participants (APs)

A

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.

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75
Q

CDS curve

A

Plot of CDS spreads across maturities for a single reference entity or group of reference entities in an index.

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76
Q

Conditional value at risk (CVaR)

A

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.

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77
Q

Credit cycle

A

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.

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78
Q

Credit default swap (CDS) basis

A

Yield spread on a bond, as compared to CDS spread of same tenor.

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79
Q

Credit loss rate

A

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.

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80
Q

Credit migration

A

The change in a bond’s credit rating over a certain period.

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81
Q

Credit valuation adjustment (CVA)

A

The present value of credit risk for a loan, bond, or derivative obligation.

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82
Q

Default intensity

A

POD over a specified time period in a reduced form credit model.

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83
Q

Default risk

A

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.

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84
Q

Discount margin

A

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.

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85
Q

Duration Times Spread (DTS)

A

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.

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86
Q

Empirical duration

A

The use of statistical methods and historical bond prices to estimate the price–yield relationship for a specific bond or portfolio of bonds.

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87
Q

Excess spread

A

Credit spread return measure that incorporates both changes in spread and expected credit losses for a given period.

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88
Q

G-spread

A

The yield spread in basis points over an actual or interpolated government bond.

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89
Q

Green bonds

A

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.

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90
Q

Hazard rate

A

The probability that an event will occur, given that it has not already occurred.

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91
Q

I-spread (interpolated spread)

A

Yield spread measure using swaps or constant maturity Treasury YTMs as a benchmark.

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92
Q

Incremental VaR (or partial VaR)

A

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.

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93
Q

Loss severity

A

Portion of a bond’s value (including unpaid interest) an investor loses in the event of default.

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94
Q

Matrix pricing (or evaluated pricing)

A

Methodology for pricing infrequently traded bonds using bonds from similar issuers and actively traded government benchmarks to establish a bond’s fair value.

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95
Q

OAS duration

A

The change in bond price for a given change in OAS.

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96
Q

Option-adjusted spread (OAS)

A

A generalization of the Z-spread yield spread calculation that incorporates bond option pricing based on assumed interest rate volatility.

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97
Q

Probability of default

A

The likelihood that a borrower defaults or fails to meet its obligation to make full and timely payments of principal and interest.

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98
Q

Quoted margin

A

The yield spread over the MRR established upon issuance of an FRN to compensate investors for assuming an issuer’s credit risk.

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99
Q

Reduced form credit models

A

Credit models that solve for default probability over a specific time period using observable company-specific variables such as financial ratios and macroeconomic variables.

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100
Q

Relative VaR

A

Ex ante tracking error

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101
Q

Structural credit models

A

Credit models that apply market-based variables to estimate the value of an issuer’s assets and the volatility of asset value.

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102
Q

Value at risk (VaR)

A

The minimum loss that would be expected a certain percentage of the time over a certain period of time given the assumed market conditions.

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103
Q

Yield spread

A

The simple difference between a bond’s YTM and the YTM of an on-the-run government bond of similar maturity.

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104
Q

Z-score

A

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.

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105
Q

Zero-discount margin (Z-DM)

A

A yield spread calculation for FRNs that incorporates forward MRR.

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106
Q

Activist short selling

A

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.

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106
Q

Zero-volatility spread (Z-spread)

A

Calculates a constant yield spread over a government (or interest rate swap) spot curve.

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107
Q

Cross-sectional momentum

A

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.

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108
Q

Dedicated short-selling

A

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.

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109
Q

Fulcrum securities

A

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.

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110
Q

Fund-of-funds

A

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.

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111
Q

Hard-catalyst event-driven approach

A

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.

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112
Q

Life settlement

A

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.

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113
Q

Multi-class trading

A

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.

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114
Q

Multi-manager fund

A

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.

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115
Q

Multi-strategy fund

A

A fund in which teams of portfolio managers trade and invest in multiple different strategies within the same fund.

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116
Q

Pairs trading

A

An approach to trading that uses pairs of closely related stocks, buying the relatively undervalued stock and selling short the relatively overvalued stock.

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117
Q

Quantitative market-neutral

A

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.

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118
Q

Relative value volatility arbitrage

A

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.

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119
Q

Short-biased

A

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.

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120
Q

Soft-catalyst event-driven approach

A

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.

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121
Q

Single-manager fund

A

A fund in which one portfolio manager or team of portfolio managers invests in one strategy or style.

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122
Q

Stub trading

A

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.

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123
Q

Time-series momentum

A

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.

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124
Q

Capture ratio

A

A measure of the manager’s gain or loss relative to the gain or loss of the benchmark.

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125
Q

Due diligence

A

Investigation and analysis in support of an investment action, decision, or recommendation.

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126
Q

Drawdown duration

A

The total time from the start of the drawdown until the cumulative drawdown recovers to zero.

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127
Q

Holdings-based style analysis

A

A bottom-up style analysis that estimates the risk exposures from the actual securities held in the portfolio at a point in time.

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128
Q

Key person risk

A

The risk that results from over-reliance on an individual or individuals whose departure would negatively affect an investment manager.

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129
Q

Returns-based style analysis

A

A top-down style analysis that involves estimating the sensitivities of a portfolio to security market indexes.

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130
Q

Stop-losses

A

A trading order that sets a selling price below the current market price with a goal of protecting profits or preventing further losses.

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131
Q

Risk premium

A

An extra return expected by investors for bearing some specified risk.

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132
Q

Accounting defeasance

A

Also called in-substance defeasance, _____ is a way of extinguishing a debt obligation by setting aside sufficient high-quality securities to repay the liability.

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132
Q

Cell approach

A

Stratified samplingA sampling method that guarantees that subpopulations of interest are represented in the sample. Also calledrepresentative samplingor _____.

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133
Q

Enhanced indexing strategy Method

A

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.

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134
Q

Evaluated pricing

A

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.

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135
Q

Key rate duration

A

A method of measuring the interest rate sensitivities of a fixed-income instrument or portfolio to shifts in key points along the yield curve.

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136
Q

Full replication approach

A

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.

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137
Q

Immunization

A

An asset/liability management approach that structures investments in bonds to match (offset) liabilities’ weighted-average duration; a type of dedication strategy.

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138
Q

Passive investment

A

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.

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139
Q

Matrix pricing

A

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.

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140
Q

Present value of distribution of cash flows methodology

A

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.

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141
Q

Stratified sampling

A

A sampling method that guarantees that subpopulations of interest are represented in the sample. Also calledrepresentative samplingorcell approach.

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142
Q

Smart beta

A

Involves the use of simple, transparent, rules-based strategies as a basis for investment decisions.

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143
Q

Total return swap

A

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.

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143
Q

Bear spread

A

An option strategy that becomes more valuable when the price of the underlying asset declines, so requires buying one option and writing another with alowerexercise 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.

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144
Q

Bull spread

A

An option strategy that becomes more valuable when the price of the underlying asset rises, so requires buying one option and writing another with ahigherexercise 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.

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145
Q

Structural risk

A

Risk that arises from portfolio design, particularly the choice of the portfolio allocations.

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146
Q

Surplus

A

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).

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147
Q

Cash-secured put

A

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).

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148
Q

Collar

A

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.

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149
Q

Calendar spread

A

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) _____.

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150
Q

Covered call

A

An option strategy in which a long position in an asset is combined with a short position in a call on that asset.

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151
Q

Implied volatility

A

The standard deviation that causes an option pricing model to give the current option price.

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152
Q

Delta

A

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
Q

Gamma

A

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
Q

Implied volatility surface

A

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
Q

Realized volatility

A

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
Q

Risk reversal

A

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
Q

Synthetic long forward position

A

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
Q

Straddle

A

An option combination in which one buysbothputs and calls, with the same exercise price and same expiration date, on the same underlying asset. In contrast to this long _____, if someonewritesboth options, it is a short _____.

158
Q

Position delta

A

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
Q

Protective put

A

A strategy of purchasing an underlying asset and purchasing a put on the same asset.

160
Q

Theta

A

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
Q

Vega

A

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
Q

Volatility skew

A

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
Q

Synthetic short forward position

A

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
Q

Term structure of volatility

A

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
Q

Active management

A

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
Q

Volatility smile

A

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
Q

Active risk

A

The standard deviation of active returns.

166
Q

Cash flow matching

A

Immunization approach that attempts to ensure that all future liability payouts are matched precisely by cash flows from bonds or fixed-income derivatives.

167
Q

Contingent immunization

A

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
Q

Active return

A

The return on a portfolio minus the return on the portfolio’s benchmark.

169
Q

Duration matching

A

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
Q

Repo rate

A

The interest rate on a repurchase agreement.

170
Q

Repurchase agreements

A

In _____, orrepos, 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
Q

Enhanced indexing approach

A

Maintains a close link to the benchmark but attempts to generate a modest amount of outperformance relative to the benchmark.

171
Q

Liability-based mandates

A

Mandates managed to match or cover expected liability payments (future cash outflows) with future projected cash inflows.

172
Q

Pure indexing

A

Attempts to replicate a bond index as closely as possible, targeting zero active return and zero active risk.

173
Q

Rebate rate

A

The portion of the collateral earnings rate that is repaid to the security borrower by the security lender.

174
Q

Relative value

A

A concept that describes the selection of the most attractive individual securities to populate the portfolio with, using ranking and comparing.

175
Q

Asset-only

A

With respect to asset allocation, an approach that focuses directly on the characteristics of the assets without explicitly modeling the liabilities.

175
Q

Calendar rebalancing

A

Rebalancing a portfolio to target weights on a periodic basis; for example, monthly, quarterly, semiannually, or annually.

176
Q

Decision-reversal risk

A

The risk of reversing a chosen course of action at the point of maximum loss.

177
Q

Dynamic asset allocation

A

_____ is an investment strategy premised on long-term asset allocation but employing short-term, tactical trading to maintain investment allocation targets.

178
Q

Reverse repos

A

Repurchase agreements from the standpoint of the lender.

179
Q

Spread duration

A

The change in bond price for a given change in yield spread. Also referred to asOAS durationwhen the option-adjusted spread (OAS) is the yield measure used.

179
Q

Total return payer

A

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
Q

Total return receiver

A

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
Q

Tracking error

A

The standard deviation of the differences between a portfolio’s returns and its benchmark’s returns; a synonym ofactive risk. Also calledtracking risk.

181
Q

Tracking risk

A

The standard deviation of the differences between a portfolio’s returns and its benchmarks returns. Also calledtracking error.

182
Q

Active risk budgeting

A

Risk budgeting that concerns active risk (risk relative to a portfolio’s benchmark).

183
Q

Goals-based

A

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
Q

Economic balance sheet

A

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 asholistic balance sheet.

185
Q

Extended portfolio assets and liabilities

A

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
Q

Goals-based investing

A

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
Q

Liability-relative

A

With respect to asset allocation, an approach that focuses directly only on funding liabilities as an investment objective.

187
Q

Passive management

A

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
Q

Percent-range rebalancing

A

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
Q

Home-country bias

A

The favoring of domestic over non-domestic investments relative to global market value weights.

188
Q

Liability glide path

A

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
Q

Liability-driven investing

A

An investment industry term that generally encompasses asset allocation that is focused on funding an investor’s liabilities in institutional contexts.

190
Q

High-water mark

A

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
Q

Impact investing

A

_____ 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
Q

Negative screening

A

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
Q

Rebalancing

A

In the context of asset allocation, a discipline for adjusting the portfolio to align with the strategic asset allocation.

193
Q

Rebalancing range

A

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
Q

Risk budgeting

A

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
Q

Tactical asset allocation

A

Asset allocation that involves making short-term adjustments to asset class weights based on short-term predictions of relative performance among asset classes.

195
Q

Trigger points

A

In the context of portfolio rebalancing, the endpoints of a rebalancing range (corridor).

196
Q

Best-in-class

A

An ESG implementation approach that seeks to identify the most favorable companies and sectors based on ESG considerations. Also calledpositive screening.

196
Q

Dividend capture

A

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
Q

Longevity risk

A

The risk of outliving one’s financial resources.

198
Q

Mortality table

A

A table that indicates individual life expectancies at specified ages.

199
Q

Optional stock dividends

A

A type of dividend in which shareholders may elect to receive either cash or new shares.

199
Q

Positive screening

A

An ESG implementation approach that seeks to identify the most favorable companies and sectors based on ESG considerations. Also calledbest-in-class.

200
Q

Securities lending

A

A form of collateralized lending that may be used to generate income for portfolios.

200
Q

Special dividends

A

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
Q

Stock lending

A

Securities lending involving the transfer of equities.

201
Q

Thematic investing

A

An investment approach that focuses on companies within a specific sector or following a specific theme, such as energy efficiency or climate change.

202
Q

Asset location

A

The type of account an asset is held within, e.g., taxable or tax deferred.

203
Q

Capital sufficiency analysis

A

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 ascapital needs analysis.

204
Q

Capital needs analysis

A

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
Q

Deferred annuity

A

An annuity that enables an individual to purchase an income stream that will begin at a later date.

205
Q

Financial capital

A

The tangible and intangible assets (excluding human capital) owned by an individual or household.

206
Q

Human capital

A

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 callednet employment capital.

206
Q

Immediate annuity

A

An annuity that provides a guarantee of specified future monthly payments over a specified period of time.

207
Q

Investment policy statement

A

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
Q

Risk perception

A

The subjective assessment of the risk involved in the outcome of an investment decision.

209
Q

Risk tolerance

A

The amount of risk an investor is willing and able to bear to achieve an investment goal.

210
Q

Buffering

A

Establishing ranges around breakpoints that define whether a stock belongs in one index or another.

210
Q

Cash drag

A

Tracking error caused by temporarily uninvested cash.

211
Q

Completion overlay

A

A type of overlay that addresses an indexed portfolio that has diverged from its proper exposure.

211
Q

Currency overlay

A

A type of overlay that helps hedge the returns of securities held in foreign currency back to the home country’s currency.

212
Q

Overlay

A

A derivative position (or positions) used to adjust a pre-existing portfolio closer to its objectives.

212
Q

Exhaustive

A

An index construction strategy that selects every constituent of a universe.

213
Q

Risk capacity

A

The ability to accept financial risk.

214
Q

Risk aversion

A

The degree of an investor’s unwillingness to take risk; the inverse of risk tolerance.

215
Q

Canada model

A

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
Q

Decumulation phase

A

Phase where the government predominantly withdraws from a sovereign wealth pension reserve fund.

216
Q

Packeting

A

Splitting stock positions into multiple parts.

216
Q

Program trading

A

A strategy of buying or selling many stocks simultaneously.

217
Q

Rebalancing overlay

A

A type of overlay that addresses a portfolio’s need to sell certain constituent securities and buy others.

218
Q

Selective

A

An index construction methodology that targets only those securities with certain characteristics.

219
Q

Time deposits

A

Interest-bearing accounts that have a specified maturity date. This category includes savings accounts and certificates of deposit (CDs).

219
Q

Term deposits

A

Interest-bearing accounts that have a specified maturity date. This category includes savings accounts and certificates of deposit (CDs).

220
Q

Vesting

A

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
Q

Absolute return benchmark

A

A minimum target return that an investment manager is expected to beat.

221
Q

Accumulation phase

A

Phase where the government predominantly contributes to a sovereign wealth pension reserve fund.

222
Q

Defined benefit

A

A retirement plan in which a plan sponsor commits to paying a specified retirement benefit.

222
Q

Defined contribution

A

A retirement plan in which contributions are defined but the ultimate retirement benefit is not specified or guaranteed by the plan sponsor.

223
Q

Demand deposits

A

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
Q

Endowment model

A

Characterized by a high allocation to alternative investments (private investments and hedge funds), significant active management, and externally managed assets.

225
Q

General account

A

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
Q

Liability driven investing (LDI) model

A

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
Q

Limited-life foundations

A

A type of foundation where founders seek to maintain control of spending while they (or their immediate heirs) are still alive.

227
Q

Mission-related investing

A

Aims to direct a significant portion of assets in excess of annual grants into projects promoting a foundation’s mission.

227
Q

Norway model

A

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
Q

Participant-switching life-cycle options

A

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
Q

Participant/cohort option

A

Pools the DC plan member with a cohort that has a similar target retirement date.

229
Q

Reserve portfolio

A

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
Q

Separate accounts

A

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
Q

Surplus portfolio

A

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
Q

Life-cycle finance

A

A concept in finance that recognizes as an investor ages, the fundamental nature of wealth and risk evolves.

231
Q

Permanent life insurance

A

A type of life insurance that provides lifetime coverage.

232
Q

Property insurance

A

A type of insurance used by individuals to manage property risk.

232
Q

Premature death risk

A

The risk of an individual dying earlier than anticipated; sometimes referred to asmortality risk.

233
Q

Property risk

A

The possibility that a person’s property may be damaged, destroyed, stolen, or lost.

234
Q

Arithmetic attribution

A

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
Q

Carhart model

A

A four factor model used in performance attribution. The four factors are: market (RMRF), size (SMB), value (HML), and momentum (WML).

235
Q

Custom security-based benchmark

A

Benchmark that is custom built to accurately reflect the investment discipline of a particular investment manager. Also called astrategy benchmarkbecause it reflects a manager’s particular strategy.

236
Q

Drawdown

A

A percentage peak-to-trough reduction in net asset value.

237
Q

Excess return

A

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
Q

Factor-model-based benchmarks

A

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
Q

Holdings-based attribution

A

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
Q

Interaction effect

A

The attribution effect resulting from the interaction of the allocation and selection decisions.

241
Q

Macro attribution

A

Attribution at the sponsor level.

241
Q

Manager peer group

A

Manager universeA broad group of managers with similar investment disciplines. Also called_____.

242
Q

Investment style

A

A natural grouping of investment disciplines that has some predictive power in explaining the future dispersion of returns across portfolios.

243
Q

Manager universe

A

A broad group of managers with similar investment disciplines. Also calledmanager peer group.

243
Q

Micro attribution

A

Attribution at the portfolio manager level.

244
Q

Performance attribution

A

Attribution, including return attribution and risk attribution; often used as a synonym for return attribution.

244
Q

Return attribution

A

A set of techniques used to identify the sources of the excess return of a portfolio against its benchmark.

245
Q

Returns-based attribution

A

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
Q

Returns-based benchmarks

A

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
Q

Risk attribution

A

The analysis of the sources of risk.

247
Q

Sharpe ratio

A

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
Q

Transactions-based attribution

A

An attribution approach that captures the impact of intra-day trades and exogenous events such as a significant class action settlement.

249
Q

Disability income insurance

A

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
Q

Earnings risk

A

The risk associated with the earning potential of an individual.

250
Q

Health insurance

A

A type of insurance used to cover health care and medical costs.

250
Q

Economic net worth

A

The difference between an individual’s assets and liabilities; extends traditional financial assets and liabilities to include human capital and future consumption needs.

251
Q

Health risk

A

The risk associated with illness or injury.

252
Q

Holistic balance sheet

A

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
Q

Liability insurance

A

A type of insurance used to manage liability risk.

254
Q

Liability risk

A

The possibility that an individual or household may be held legally liable for the financial costs associated with property damage or physical injury.

254
Q

Life insurance

A

A type of insurance that protects against the loss of human capital for those who depend on an individual’s future earnings.

255
Q

Controlled foreign corporation (CFC)

A

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
Q

Discretionary trust

A

A trust that enables the trustee to determine whether and how much to distribute based on a beneficiary’s general welfare.

257
Q

Double taxation

A

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
Q

Temporary life insurance

A

A type of life insurance that covers a certain period of time, specified at purchase. Commonly referred to as “term” life insurance.

258
Q

Cross-currency basis swap

A

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
Q

Effective federal funds (FFE) rate

A

The fed funds rate actually transacted between depository institutions, not the Fed’s target federal funds rate.

259
Q

Variance notional

A

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
Q

Vega notional

A

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
Q

After-tax excess return

A

Calculated as the after-tax return of the portfolio minus the after-tax return of the associated benchmark portfolio.

261
Q

Bequest

A

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
Q

Capital gain or loss

A

For tax purposes equals the selling price (net of commissions and other trading costs) of the asset less its tax basis.

262
Q

Charitable gratuitous transfers

A

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
Q

Completion portfolio

A

__________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
Q

Charitable remainder trust

A

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 termcharitable remaindertrust.

264
Q

Equity monetization

A

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
Q

Estate

A

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
Q

Estate planning

A

The process of preparing for the disposition of one’s estate upon death and during one’s lifetime.

266
Q

Estate tax

A

Levied on the total value of a deceased person’s assets and paid out of the estate before any distributions to beneficiaries.

267
Q

Exchange fund

A

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
Q

Family constitution

A

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
Q

Family governance

A

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
Q

Fixed trust

A

Distributions to beneficiaries of a _____ are specified in the trust document to occur at certain times or in certain amounts.

271
Q

Forced heirship

A

Is the requirement that a certain proportion of assets must pass to specified family members, such as a spouse and children.

272
Q

Foundation

A

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 aprivate _____. The termfamily _____usually refers to a private _____ where donors or members of the donors’ family are actively involved.

273
Q

Generation-skipping tax

A

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
Q

Gift tax

A

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
Q

Intestate

A

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
Q

Inheritance tax

A

Paid by each individual beneficiary of a deceased person’s estate on the value of the benefit the individual received from the estate.

276
Q

Irrevocable trust

A

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
Q

Post-liquidation return

A

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
Q

Potential capital gain exposure (PCGE)

A

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
Q

Progressive tax rate schedule

A

A tax regime in which the tax rate increases as the amount of income or wealth being taxed increases.

278
Q

Probate

A

The legal process to confirm the validity of the will so that executors, heirs, and other interested parties can rely on its authenticity.

278
Q

Qualified dividends

A

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
Q

Revocable trust

A

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
Q

Staged diversification strategy

A

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
Q

Tax alpha

A

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
Q

Tax avoidance

A

The legal activity of understanding the tax laws and finding approaches that avoid or minimize taxation.

281
Q

Tax basis

A

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
Q

Tax-deferred account

A

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
Q

Tax-efficiency ratio (TER)

A

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
Q

Tax-efficient strategy

A

An investment strategy that is designed to give up very little of its return to taxes.

283
Q

Tax-efficient decumulation strategy

A

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
Q

Tax-exempt account

A

An account on which no taxes are assessed during the investment, contribution, or withdrawal phase, nor are they assessed on investment returns.

284
Q

Taxable account

A

An account on which the normal tax rules of the jurisdiction apply to investments and contributions.

285
Q

Tax evasion

A

The illegal concealment and non-payment of taxes that are otherwise due.

285
Q

Tax haven

A

A country or independent area with no or very low tax rates for foreign investors.

286
Q

Tax loss harvesting

A

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
Q

Tax lot accounting

A

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
Q

Territorial tax systems

A

Jurisdictions operate where only locally-sourced income is taxed.

288
Q

Testamentary bequest

A

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
Q

Testamentary gratuitous transfer

A

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
Q

Decision price

A

In a trading context, the _____ is the security price at the time the investment decision was made.

290
Q

Delay cost

A

The (trading related) cost associated with not submitting the order to the market in a timely manner.

291
Q

Direct market access (DMA)

A

Access in which market participants can transact orders directly with the order book of an exchange using a broker’s exchange connectivity.

291
Q

Execution cost

A

The difference between the (trading related) cost of the real portfolio and the paper portfolio, based on shares and prices transacted.

292
Q

Testator

A

The person who authored the will and whose property is disposed of according to the will.

292
Q

Trust

A

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
Q

Will (or Testament)

A

A document that outlines the rights others will have over one’s property after death.

293
Q

Withholding taxes

A

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
Q

Worldwide tax system

A

Jurisdictions that tax all income regardless of its source.

295
Q

Agency trade

A

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
Q

Alpha decay

A

In a trading context, _____ is the erosion or deterioration in short term alpha after the investment decision has been made.

297
Q

Alternative trading systems (ATS)

A

Non-exchange trading venues that bring together buyers and sellers to find transaction counterparties. Also calledmultilateral trading facilities (MTF).

297
Q

Arrival price

A

In a trading context, the _____ is the security price at the time the order was released to the market for execution.

298
Q

Implementation shortfall (IS)

A

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
Q

Multilateral trading facilities

A

Non-exchange trading venues that bring together buyers and sellers to find transaction counterparties. Also called multilateral trading facilities (MTF).

299
Q

Opportunity cost

A

Reflects the foregone opportunity of investing in a different asset. It is typically denoted by the risk-free rate of interest,r.

300
Q

Principal trade

A

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 calledbroker risk trades.

301
Q

Request for quote (RFQ)

A

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
Q

Smart order routers (SOR)

A

Smart systems used to electronically route small orders to the best markets for execution based on order type and prevailing market conditions.

303
Q

Covered interest rate parity

A

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 calledinterest rate parity.

304
Q

Trade urgency

A

A reference to how quickly or slowly an order is executed over the trading time horizon.

305
Q

Barbell

A

A fixed-income investment strategy combining short- and long-term bond positions.

305
Q

Bear flattening

A

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
Q

Bear steepening

A

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
Q

Bull flattening

A

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
Q

Bull steepening

A

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
Q

Bullet

A

A fixed-income investment strategy that focuses on the intermediate term (or “belly”) of the yield curve.

308
Q

Butterfly spread

A

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
Q

Butterfly strategy

A

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
Q

Carry trade across currencies

A

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
Q

Negative butterfly

A

An increase in the butterfly spread due to lower short- and long-term yields-to-maturity and a higher intermediate yield-to-maturity.

310
Q

Options on bond futures contracts

A

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
Q

Positive butterfly

A

A decrease in the butterfly spread due to higher short- and long-term yields-to-maturity and a lower intermediate yield-to-maturity.

311
Q

Scenario analysis

A

A technique for exploring the performance and risk of investment strategies in different structural regimes.

312
Q

Swaption

A

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
Q

Uncovered interest rate parity

A

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
Q

Credit Risk

A

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.

CFA III (1 decks)

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