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CFA Level 2 > CFA Level 2 Flashcards - 4 > Flashcards

CFA Level 2 Flashcards - 4

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1
Q

Extendible bond

A

Bond with an embedded option that gives the bondholder the right to keep the bond for a number of years after maturity, possibly with a different coupon.

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2
Q

Floored floater

A

Floating-rate bond with a floor provision that prevents the coupon rate from decreasing below a specified minimum rate. It protects the investor against declining interest rates.

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3
Q

Forced conversion

A

For a convertible bond, when the issuer calls the bond and forces bondholders to convert their bonds into shares, which typically happens when the underlying share price increases above the conversion price.

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4
Q

Key rate durations

A

Sensitivity of a bond’s price to changes in specific maturities on the benchmark yield curve. Also called partial durations

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5
Q

Market conversion premium per share

A

For a convertible bond, the difference between the market conversion price and the underlying share price, which allows investors to identify the premium or discount payable when buying a convertible bond rather than the underlying common stock.

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6
Q

Market conversion premium ratio

A

For a convertible bond, the market conversion premium per share expressed as a percentage of the current market price of the shares.

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7
Q

One-sided durations

A

Effective durations when interest rates go up or down, which are better at capturing the interest rate sensitivity of bonds with embedded options that do not react symmetrically to positive and negative changes in interest rates of the same magnitude

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8
Q

Option-adjusted spread

A

(OAS) Constant spread that, when added to all the one-period forward rates on the interest rate tree, makes the arbitrage-free value of the bond equal to its market price.

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9
Q

Protection period

A

Period during which a bond’s issuer cannot call the bond.

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10
Q

Putable bond

A

Bond that includes an embedded put option, which gives the bondholder the right to put back the bonds to the issuer prior to maturity, typically when interest rates have risen and higher-yielding bonds are available.

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11
Q

Sinking fund bond

A

A bond that requires the issuer to set aside funds over time to retire the bond issue, thus reducing credit risk

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12
Q

Straight bond

A

An underlying option-free bond with a specified issuer, issue date, maturity date, principal amount and repayment structure, coupon rate and payment structure, and currency denomination.

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13
Q

Covered bonds

A

A senior debt obligation of a financial institution that gives recourse to the originator/issuer and a predetermined underlying collateral pool.

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14
Q

Credit valuation adjustment

A

The value of the credit risk of a bond in present value terms.

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15
Q

Expected exposure

A

The projected amount of money an investor could lose if an event of default occurs, before factoring in possible recovery.

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16
Q

Loss given default

A

The amount that will be lost if a default occurs

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17
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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18
Q

Recovery rate

A

The percentage of the loss recovered.

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19
Q

Bankruptcy

A

A declaration provided for by a country’s laws that typically involves the establishment of a legal procedure that forces creditors to defer their claims

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20
Q

Basis trade

A

A trade based on the pricing of credit in the bond market versus the price of the same credit in the CDS market. To execute a basis trade, go long the “underpriced” credit and short the “overpriced” credit. A profit is realized as the implied credit prices converge

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21
Q

CDS spread

A

A periodic premium paid by the buyer to the seller that serves as a return over a market reference rate required to protect against credit risk.

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22
Q

Cash settlement

A

A procedure used in certain derivative transactions that specifies that the long and short parties settle the derivative’s difference in value between them by making a cash payment.

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23
Q

Cheapest-to-deliver

A

The debt instrument that can be purchased and delivered at the lowest cost yet has the same seniority as the reference obligation.

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24
Q

Credit correlation

A

The correlation of credit (or default) risks of the underlying single-name CDS contained in an index CDS.

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25
Q

Credit curve

A

The credit spreads for a range of maturities of a company’s debt.

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26
Q

Credit default swap

A

A derivative contract between two parties in which the buyer makes a series of cash payments to the seller and receives a promise of compensation for credit losses resulting from the default.

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27
Q

Credit derivative

A

A derivative instrument in which the underlying is a measure of the credit quality of a borrower

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28
Q

Credit event

A

An event that defines a payout in a credit derivative. Events are usually defined as bankruptcy, failure to pay an obligation, or an involuntary debt restructuring.

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29
Q

Credit protection buyer

A

One party to a credit default swap; the buyer makes a series of cash payments to the seller and receives a promise of compensation for credit losses resulting from the default.

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30
Q

Credit protection seller

A

One party to a credit default swap; the seller makes a promise to pay compensation for credit losses resulting from the default.

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31
Q

Credit risk

A

The risk of loss caused by a counterparty’s or debtor’s failure to make a promised payment. Also called default risk

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32
Q

Curve trade

A

Buying a CDS of one maturity and selling a CDS on the same reference entity with a different maturity.

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33
Q

Default risk

A

The risk of loss caused by a counterparty’s or debtor’s failure to make a promised payment.

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34
Q

Depository Trust and Clearinghouse Corporation

A

A US-headquartered entity providing post-trade clearing, settlement, and information services.

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35
Q

Failure to pay

A

When a borrower does not make a scheduled payment of principal or interest on any outstanding obligations after a grace period.

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36
Q

Hazard rate

A

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

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37
Q

ISDA Master Agreement

A

A standard or “master” agreement published by the International Swaps and Derivatives Association. The master agreement establishes the terms for each party involved in the transaction.

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38
Q

Index CDS

A

A type of credit default swap that involves a combination of borrowers.

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39
Q

Interest rate risk

A

The risk that interest rates will rise and therefore the market value of current portfolio holdings will fall so that their current yields to maturity then match comparable instruments in the marketplace.

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40
Q

Long/short credit trade

A

A credit protection seller with respect to one entity combined with a credit protection buyer with respect to another entity.

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41
Q

Monetizing

A

Unwinding a position to either capture a gain or realize a loss

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42
Q

Naked credit default swap

A

A position where the owner of the CDS does not have a position in the underlying credit.

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43
Q

Notional amount

A

The amount of protection being purchased in a CDS

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44
Q

Off-the-run

A

A series of securities or indexes that were issued/created prior to the most recently issued/created series.

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45
Q

On-the-run

A

The most recently issued and most actively traded sovereign securities.

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46
Q

Payout amount

A

The loss given default times the notional

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47
Q

Physical settlement

A

Involves actual delivery of the debt instrument in exchange for a payment by the credit protection seller of the notional amount of the contract.

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48
Q

Premium leg

A

The series of payments the credit protection buyer promises to make to the credit protection seller.

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49
Q

Probability of survival

A

The probability that a bond issuer will meet its contractual obligations on schedule.

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50
Q

Protection leg

A

The contingent payment that the credit protection seller may have to make to the credit protection buyer.

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51
Q

Reference entity

A

The borrower (debt issuer) covered by a single-name CDS.

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52
Q

Reference obligation

A

A particular debt instrument issued by the borrower that is the designated instrument being covered.

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53
Q

Restructuring

A

Reorganizing the capital structure of a firm

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54
Q

Roll

A

When an investor moves its investment position from an older series to the most current series.

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55
Q

Settlement

A

The closing date at which the counterparties of a derivative contract exchange payment for the underlying as required by the contract

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56
Q

Single-name CDS

A

Credit default swap on one specific borrower.

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57
Q

Succession event

A

A change of corporate structure of the reference entity, such as through a merger, a divestiture, a spinoff, or any similar action, in which ultimate responsibility for the debt in question is unclear.

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58
Q

Tranche CDS

A

A type of credit default swap that covers a combination of borrowers but only up to pre-specified levels of losses.

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59
Q

Upfront payment

A

The difference between the credit spread and the standard rate paid by the protection buyer if the standard rate is insufficient to compensate the protection seller. Also called upfront premium.

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60
Q

Upfront premium

A

The difference between the credit spread and the standard rate paid by the protection buyer if the standard rate is insufficient to compensate the protection seller.

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61
Q

Advanced set

A

An arrangement in which the reference interest rate is set at the time the money is deposited

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62
Q

Advanced settled

A

An arrangement in which a forward rate agreement (FRA) expires and settles at the same time, at the FRA expiration date.

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63
Q

At market contract

A

When a forward contract is established, the forward price is negotiated so that the market value of the forward contract on the initiation date is zero.

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64
Q

Carry arbitrage model

A

A no-arbitrage approach in which the underlying instrument is either bought or sold along with an opposite position in a forward contract.

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65
Q

Carry benefits

A

Benefits that arise from owning certain underlyings; for example, dividends, foreign interest, and bond coupon payments.

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66
Q

Carry costs

A

Costs that arise from owning certain underlyings. They are generally a function of the physical characteristics of the underlying asset and also the interest forgone on the funds tied up in the asset

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67
Q

Convergence

A

The tendency for differences in output per capita across countries to diminish over time. In technical analysis, the term describes the case when an indicator moves in the same manner as the security being analyzed.

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68
Q

Cost of carry model

A

A model that relates the forward price of an asset to the spot price by considering the cost of carry (also referred to as future-spot parity model).

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69
Q

Dividend index point

A

A measure of the quantity of dividends attributable to a particular index

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70
Q

Equity swap

A

A swap transaction in which at least one cash flow is tied to the return on an equity portfolio position, often an equity index.

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71
Q

Forward price

A

Represents the price agreed upon in a forward contract to be exchanged at the contract’s maturity date, T. This price is shown in equations as F0 (T).

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72
Q

Forward rate agreement

A

An over-the-counter forward contract in which the underlying is an interest rate on a deposit. A forward rate agreement (FRA) calls for one party to make a fixed interest payment and the other to make an interest payment at a rate to be determined at contract expiration.

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73
Q

Forward value

A

The monetary value of an existing forward contract.

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74
Q

Futures value

A

The monetary value of an existing futures contract

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75
Q

Reverse carry arbitrage

A

A strategy involving the short sale of the underlying and an offsetting opposite position in the derivative

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76
Q

Settled in arrears

A

An arrangement in which the interest payment is made (i.e., settlement occurs) at the maturity of the underlying instrument.

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77
Q

Swap rate

A

The fixed rate to be paid by the fixed-rate payer specified in a swap contract.

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78
Q

Exercise value

A

The value of an option if it were exercised. Also sometimes called intrinsic value

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79
Q

Expectations approach

A

A procedure for obtaining the value of an option derived from discounting at the risk-free rate its expected future payoff based on risk neutral probabilities.

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80
Q

Implied volatility

A

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

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81
Q

No-arbitrage approach

A

A procedure for obtaining the value of an option based on the creation of a portfolio that replicates the payoffs of the option and deriving the option value from the value of the replicating portfolio.

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82
Q

Rho

A

The change in a given derivative instrument for a given small change in the risk-free interest rate, holding everything else constant. Rho measures the sensitivity of the option to the risk-free interest rate

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83
Q

Theta

A

The change in a derivative instrument for a given small change in calendar time, holding everything else constant. Specifically, the theta calculation assumes nothing changes except calendar time. Theta also reflects the rate at which an option’s time value decays.

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84
Q

Commercial real estate properties

A

Income-producing real estate properties; properties purchased with the intent to let, lease, or rent (in other words, produce income).

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85
Q

Core real estate investment style

A

Investing in high-quality, well-leased, core property types with low leverage (no more than 30% of asset value) in the largest markets with strong, diversified economies. It is a conservative strategy designed to avoid real estate–specific risks, including leasing, development, and speculation in favor of steady returns. Hotel properties are excluded from the core categories because of the higher cash flow volatility resulting from single-night leases and the greater importance of property operations, brand, and marketing.

86
Q

Gross lease

A

A lease under which the tenant pays a gross rent to the landlord, who is responsible for all operating costs, utilities, maintenance expenses, and real estate taxes relating to the property

87
Q

Hedonic index

A

Unlike a repeat-sales index, a hedonic index does not require repeat sales of the same property. It requires only one sale. The way it controls for the fact that different properties are selling each quarter is to include variables in the regression that control for differences in the characteristics of the property, such as size, age, quality of construction, and location.

88
Q

Mortgage

A

A loan with real estate serving as collateral for the loan.

89
Q

Net lease

A

A lease under which the tenant pays a net rent to the landlord and an additional amount based on the tenant’s pro rata share of the operating costs, utilities, maintenance expenses, and real estate taxes relating to the property.

90
Q

Net operating income (NOI)

A

Gross rental revenue minus operating costs but before deducting depreciation, corporate overhead, and interest expense. In the context of real estate, a measure of the income from the property after deducting operating expenses for such items as property taxes, insurance, maintenance, utilities, repairs, and insurance but before deducting any costs associated with financing and before deducting federal income taxes. It is similar to EBITDA in a financial reporting context.

91
Q

Non-residential properties

A

Commercial real estate properties other than multi-family properties, farmland, and timberland.

92
Q

Repeat sales index

A

As the name implies, this type of index relies on repeat sales of the same property. In general, the idea supporting this type of index is that because it is the same property that sold twice, the change in value between the two sale dates indicates how market conditions have changed over time.

93
Q

Residential properties

A

Properties that provide housing for individuals or families. Single-family properties may be owner-occupied or rental properties, whereas multi-family properties are rental properties even if the owner or manager occupies one of the units.

94
Q

Triple-net leases

A

Leases that require each tenant to pay its share of the following three operating expenses: common area maintenance and repair expenses; property taxes; and building insurance costs. Also known as NNN leases

95
Q

Direct capitalization method

A

In the context of real estate, this method estimates the value of an income-producing property based on the level and quality of its net operating income.

96
Q

Discounted cash flow (DCF) method

A

Income approach that values an asset based on estimates of future cash flows discounted to present value by using a discount rate reflective of the risks associated with the cash flows. In the context of real estate, this method estimates the value of an income-producing property based on discounting future projected cash flows.

97
Q

Highest and best use

A

The concept that the best use of a vacant site is the use that would result in the highest value for the land. Presumably, the developer that could earn the highest risk-adjusted profit based on time, effort, construction and development cost, leasing, and exit value would be the one to pay the highest price for the land.

98
Q

Replacement cost

A

In the context of real estate, the value of a building assuming it was built today using current construction costs and standards.

99
Q

Sales comparison approach

A

In the context of real estate, this approach estimates value based on what similar or comparable properties (comparables) transacted for in the current market.

100
Q

Stabilized NOI

A

In the context of real estate, the expected NOI when a renovation is complete.

101
Q

Adjusted funds from operations (AFFO)

A

Funds from operations adjusted to remove any non-cash rent reported under straight-line rent accounting and to subtract maintenance-type capital expenditures and leasing costs, including leasing agents’ commissions and tenants’ improvement allowances.

102
Q

Cash available for distribution

A

Adjusted funds from operations

103
Q

Equity REITs

A

REITs that own, operate, and/or selectively develop income-producing real estate.

104
Q

Funds available for distribution (FAD)

A

Adjusted funds from operations

105
Q

Funds from operations (FFO)

A

Net income (computed in accordance with generally accepted accounting principles) plus (1) gains and losses from sales of properties and (2) depreciation and amortization.

106
Q

Net asset value per share (NAVPS)

A

Net asset value divided by the number of shares outstanding.

107
Q

Non-cash rent

A

An amount equal to the difference between the average contractual rent over a lease term (the straight-line rent) and the cash rent actually paid during a period. This figure is one of the deductions made from FFO to calculate AFFO.

108
Q

Real estate investment trusts (REITs)

A

Tax-advantaged entities (companies or trusts) that own, operate, and—to a limited extent—develop income-producing real estate property.

109
Q

Real estate operating companies (REOCs)

A

Regular taxable real estate ownership companies that operate in the real estate industry in countries that do not have a tax-advantaged REIT regime in place or that are engage in real estate activities of a kind and to an extent that do not fit in their country’s REIT framework.

110
Q

Straight-line rent

A

The average annual rent under a multi-year lease agreement that contains contractual increases in rent during the life of the lease.

111
Q

Straight-line rent adjustment

A

An amount equal to the difference between the average contractual rent over a lease term (the straight-line rent) and the cash rent actually paid during a period. This figure is one of the deductions made from FFO to calculate AFFO.

112
Q

Taxable REIT subsidiaries

A

Subsidiaries that pay income taxes on earnings from non-REIT-qualifying activities like merchant development or third-party property management.

113
Q

Backwardation

A

A condition in the futures markets in which the spot price exceeds the futures price, the forward curve is downward sloping, and the convenience yield is high.

114
Q

Basis

A

The difference between the spot price and the futures price. As the maturity date of the futures contract nears, the basis converges toward zero

115
Q

Collateral return

A

The component of the total return on a commodity futures position attributable to the yield for the bonds or cash used to maintain the futures position. Also called collateral yield.

116
Q

Commodity swap

A

A type of swap involving the exchange of payments over multiple dates as determined by specified reference prices or indexes relating to commodities.

117
Q

Contango

A

A condition in the futures markets in which the spot price is lower than the futures price, the forward curve is upward sloping, and there is little or no convenience yield.

118
Q

Futures price

A

The pre-agreed price at which a futures contract buyer (seller) agrees to pay (receive) for the underlying at the maturity date of the futures contract.

119
Q

Rebalance return

A

A return from rebalancing the component weights of an index.

120
Q

Roll return

A

The component of the return on a commodity futures contract attributable to rolling long futures positions forward through time. Also called roll yield.

121
Q

Spot price

A

The current price of an asset or security. For commodities, the current price to deliver a physical commodity to a specific location or purchase and transport it away from a designated location

122
Q

Authorized participants

A

(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.

123
Q

Creation basket

A

The list of securities (and share amounts) the authorized participant (AP) must deliver to the ETF manager in exchange for ETF shares. The creation basket is published each business day

124
Q

Creation units

A

Large blocks of ETF shares transacted between the authorized participant (AP) and the ETF manager that are usually but not always equal to 50,000 shares of the ETF.

125
Q

Creation/redemption

A

The process in which ETF shares are created or redeemed by authorized participants transacting with the ETF issuer.

126
Q

iNAVs

A

“Indicated” net asset values are intraday “fair value” estimates of an ETF share based on its creation basket.

127
Q

Redemption basket

A

The list of securities (and share amounts) the authorized participant (AP) receives when it redeems ETF shares back to the ETF manager. The redemption basket is published each business day.

128
Q

Active factor risk

A

The contribution to active risk squared resulting from the portfolio’s different-than-benchmark exposures relative to factors specified in the risk model.

129
Q

Active return

A

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

130
Q

Active risk

A

The standard deviation of active returns.

131
Q

Active risk squared

A

The variance of active returns; active risk raised to the second power.

132
Q

Active specific risk

A

The contribution to active risk squared resulting from the portfolio’s active weights on individual assets as those weights interact with assets’ residual risk.

133
Q

Arbitrage

A

1) The simultaneous purchase of an undervalued asset or portfolio and sale of an overvalued but equivalent asset or portfolio, in order to obtain a riskless profit on the price differential. Taking advantage of a market inefficiency in a risk-free manner. 2) The condition in a financial market in which equivalent assets or combinations of assets sell for two different prices, creating an opportunity to profit at no risk with no commitment of money. In a well-functioning financial market, few arbitrage opportunities are possible. 3) A risk-free operation that earns an expected positive net profit but requires no net investment of money.

134
Q

Arbitrage portfolio

A

The portfolio that exploits an arbitrage opportunity.

135
Q

Company fundamental factors

A

Factors related to the company’s internal performance, such as factors relating to earnings growth, earnings variability, earnings momentum, and financial leverage.

136
Q

Company share-related factors

A

Valuation measures and other factors related to share price or the trading characteristics of the shares, such as earnings yield, dividend yield, and book-to-market value.

137
Q

Factor

A

A common or underlying element with which several variables are correlated.

138
Q

Factor portfolio

A

A portfolio with sensitivity of 1 to the factor in question and a sensitivity of 0 to all other factors.

139
Q

Factor price

A

The expected return in excess of the risk-free rate for a portfolio with a sensitivity of 1 to one factor and a sensitivity of 0 to all other factors

140
Q

Factor risk premium

A

The expected return in excess of the risk-free rate for a portfolio with a sensitivity of 1 to one factor and a sensitivity of 0 to all other factors. Also called factor price.

141
Q

Fundamental factor models

A

A multifactor model in which the factors are attributes of stocks or companies that are important in explaining cross-sectional differences in stock prices.

142
Q

Information ratio

A

(IR) Mean active return divided by active risk; or alpha divided by the standard deviation of diversifiable risk.

143
Q

Macroeconomic factor model

A

A multifactor model in which the factors are surprises in macroeconomic variables that significantly explain equity returns.

144
Q

Macroeconomic factors

A

Factors related to the economy, such as the inflation rate, industrial production, or economic sector membership

145
Q

Priced risk

A

Risk for which investors demand compensation for bearing (e.g., equity risk, company-specific factors, macroeconomic factors).

146
Q

Pure factor portfolio

A

A portfolio with sensitivity of 1 to the factor in question and a sensitivity of 0 to all other factors.

147
Q

Security selection risk

A

The contribution to active risk squared resulting from the portfolio’s active weights on individual assets as those weights interact with assets’ residual risk.

148
Q

Standardized beta

A

With reference to fundamental factor models, the value of the attribute for an asset minus the average value of the attribute across all stocks, divided by the standard deviation of the attribute across all stocks.

149
Q

Statistical factor model

A

A multifactor model in which statistical methods are applied to a set of historical returns to determine portfolios that best explain either historical return covariances or variances.

150
Q

Systematic risk

A

Risk that affects the entire market or economy; it cannot be avoided and is inherent in the overall market. Systematic risk is also known as non-diversifiable or market risk.

151
Q

Tracking error

A

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.

152
Q

Tracking risk

A

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

153
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 active share of zero; a manager with no holdings in common with the benchmark will have an active share of one.

154
Q

Conditional VaR (CVaR)

A

The weighted average of all loss outcomes in the statistical (i.e., return) distribution that exceed the VaR loss. Thus, CVaR is a more comprehensive measure of tail loss than VaR is. Sometimes referred to as the expected tail loss or expected shortfall

155
Q

Convexity

A

A measure of how interest rate sensitivity changes with a change in interest rates.

156
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. Delta is a good approximation of how an option price will change for a small change in the stock.

157
Q

Duration

A

A measure of the approximate sensitivity of a security to a change in interest rates (i.e., a measure of interest rate risk).

158
Q

Ex ante tracking error

A

A measure of the degree to which the performance of a given investment portfolio might be expected to deviate from its benchmark; also known as relative VaR

159
Q

Expected shortfall

A

The average loss conditional on exceeding the VaR cutoff; sometimes referred to as conditional VaR or expected tail loss

160
Q

Expected tail loss

A

The average loss conditional on exceeding the VaR cutoff; sometimes referred to as conditional VaR

161
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

162
Q

Historical simulation method

A

The application of historical price changes to the current portfolio.

163
Q

Incremental VaR (IVaR)

A

A measure of the incremental effect of an asset on the VaR of a portfolio by measuring the difference between the portfolio’s VaR while including a specified asset and the portfolio’s VaR with that asset eliminated.

164
Q

Lookback period

A

The time period used to gather a historical data set

165
Q

Marginal VaR (MVaR)

A

A measure of the effect of a small change in a position size on portfolio VaR

166
Q

Parametric method

A

A method of estimating VaR that uses the historical mean, standard deviation, and correlation of security price movements to estimate the portfolio VaR. Generally assumes a normal distribution but can be adapted to non-normal distributions with the addition of skewness and kurtosis. Sometimes called the variance–covariance method or the analytical method

167
Q

Relative VaR

A

A measure of the degree to which the performance of a given investment portfolio might be expected to deviate from its benchmark.

168
Q

Reverse stress testing

A

A risk management approach in which the user identifies key risk exposures in the portfolio and subjects those exposures to extreme market movements.

169
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.

170
Q

Risk decomposition

A

The process of converting a set of holdings in a portfolio into a set of exposures to risk factors

171
Q

Risk factors

A

Variables or characteristics with which individual asset returns are correlated. Sometimes referred to simply as factors

172
Q

Stop-loss limit

A

Constraint used in risk management that requires a reduction in the size of a portfolio, or its complete liquidation, when a loss of a particular size occurs in a specified period.

173
Q

Stress tests

A

A risk management technique that assesses the portfolio’s response to extreme market movements.

174
Q

Tail risk

A

The risk that losses in extreme events could be greater than would be expected for a portfolio of assets with a normal distribution.

175
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.

176
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

177
Q

Backtesting

A

The process that approximates the real-life investment process, using historical data, to assess whether an investment strategy would have produced desirable results

178
Q

Bootstrapping

A

The use of a forward substitution process to determine zero-coupon rates by using the par yields and solving for the zero-coupon rates one by one, from the shortest to longest maturities.

179
Q

Data snooping

A

The practice of determining a model by extensive searching through a dataset for statistically significant patterns

180
Q

Historical scenario analysis

A

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

181
Q

Historical simulation

A

A simulation method that uses past return data and a random number generator that picks observations from the historical series to simulate an asset’s future returns.

182
Q

Historical stress testing

A

The process that tests how investment strategies would perform under some of the most negative (i.e., adverse) combinations of events and scenarios.

183
Q

Look-ahead bias

A

A bias caused by using information that was unavailable on the test date.

184
Q

Maximum drawdown

A

The worst cumulative loss ever sustained by an asset or portfolio. More specifically, maximum drawdown is the difference between an asset’s or a portfolio’s maximum cumulative return and its subsequent lowest cumulative return.

185
Q

Monte Carlo simulation

A

A technique that uses the inverse transformation method for converting a randomly generated uniformly distributed number into a simulated value of a random variable of a desired distribution. Each key decision variable in a Monte Carlo simulation requires an assumed statistical distribution; this assumption facilitates incorporating non-normality, fat tails, and tail dependence as well as solving high-dimensionality problems.

186
Q

Point-in-time data

A

Data consisting of the exact information available to market participants as of a given point in time. Point-in-time data is used to address look-ahead bias.

187
Q

Risk parity

A

A portfolio allocation scheme that weights stocks or factors based on an equal risk contribution

188
Q

Rolling windows

A

A backtesting method that uses a rolling-window (or walk-forward) framework, rebalances the portfolio after each period, and then tracks performance over time. As new information arrives each period, the investment manager optimizes (revises and tunes) the model and readjusts stock positions.

189
Q

Sensitivity analysis

A

Analysis that shows the range of possible outcomes as specific assumptions are changed.

190
Q

Simulation

A

A technique for exploring how a target variable (e.g. portfolio returns) would perform in a hypothetical environment specified by the user, rather than a historical setting.

191
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.

192
Q

Inter-temporal rate of substitution

A

The ratio of the marginal utility of consumption s periods in the future (the numerator) to the marginal utility of consumption today (the denominator).

193
Q

Ask price

A

The price at which a trader will sell a specified quantity of a security. Also called ask, offer price, or offer.

194
Q

Best ask

A

The offer to sell with the lowest ask price. Also called best offer or inside ask.

195
Q

Best bid

A

The highest bid in the market

196
Q

Best offer

A

The lowest offer (ask price) in the market

197
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.

198
Q

Bid–ask spread

A

The ask price minus the bid price

199
Q

Delay costs

A

Implicit trading costs that arise from the inability to complete desired trades immediately. Also called slippage

200
Q

Effective spread

A

Two times the difference between the execution price and the midpoint of the market quote at the time an order is entered.

201
Q

Implementation shortfall

A

(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

202
Q

Inside ask

A

The offer to sell with the lowest ask price. Also called best offer

203
Q

Inside bid

A

The highest bid in the market.

204
Q

Inside spread

A

The spread between the best bid price and the best ask price. Also called the market bid-ask spread, inside bid-ask spread, or market spread

205
Q

Latency

A

The elapsed time between the occurrence of an event and a subsequent action that depends on that event

206
Q

Limit order book

A

The book or list of limit orders to buy and sell that pertains to a security.

207
Q

Market fragmentation

A

Trading the same instrument in multiple venues.

208
Q

Market impact

A

The effect of the trade on transaction prices. Also called price impact

209
Q

Midquote price

A

The average, or midpoint, of the prevailing bid and ask prices.

210
Q

Price improvement

A

When trade execution prices are better than quoted prices.

CFA Level 2 (5 decks)

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