CFA Glossary A full glossary of financial terms, sourced from the CFA Program curriculum

A priori probability
A probability based on logical analysis rather than on observation or personal judgment.

Abandonment option
The ability to terminate a project at some future time if the financial results are disappointing.

Abnormal earnings
See residual income.

Related Terms: Residual income Economic profit 

Absolute dispersion
The amount of variability present without comparison to any reference point or benchmark.

Absolute frequency
The number of observations in a given interval (for grouped data).

Absolute-return vehicles
Investments that have no direct benchmark portfolios.

Accelerated methods of depreciation
Depreciation methods that allocate a relatively large proportion of the cost of an asset to the early years of the asset’s useful life.

With the accounting systems, a formal record of increases and decreases in a specific asset, liability, component of owners’ equity, revenue, or expense.

Accounting estimates
Estimates of items such as the useful lives of assets, warranty costs, and the amount of uncollectible receivables.

Accounting profit
Income as reported on the income statement, in accordance with prevailing accounting standards, before the provisions for income tax expense.

Synonyms: income before taxes pretax income

Accounting risk
The risk associated with accounting standards that vary from country to country or with any uncertainty about how certain transactions should be recorded.

Related Terms: Risk exposure Risk management 

Accounts payable
Amounts that a business owes to its vendors for goods and services that were purchased from them but which have not yet been paid.

Accounts receivable turnover
Ratio of sales on credit to the average balance in accounts receivable.

Accrual basis
Method of accounting in which the effects of transactions on financial condition and income are recorded when they occur, not when they are settled in cash.

Related Terms: Accrued expenses 

Accrued expenses
Liabilities related to expenses that have been incurred but not yet paid as of the end of an accounting period. An example of an accrued expense is rent that has been incurred but not yet paid, resulting in a liability “rent payable.”

Synonyms: accrued liabilities
Related Terms: Accrual basis 

Accrued interest
Interest earned but not yet paid.

Accumulated benefit obligation (ABO)
The present value of pension benefits, assuming the pension plan terminated immediately such that it had to provide retirement income to all beneficiaries for their years of service up to that date.

Related Terms: Projected benefit obligation 

Accumulated depreciation
An offset to property, plant, and equipment (PPE) reflecting the amount of the cost of PPE that has been allocated to current and previous accounting periods.

Related Terms: Depreciation 

Accumulated service
Years of service of a pension plan participant as of a specified date.

Related Terms: Accumulated benefit obligation (ABO) Projected benefit obligation 

Acquiring company
The company in a merger or acquisition that is acquiring the target.

Synonyms: acquirer
Related Terms: Acquisition Acquisition method 

The purchase of some portion of one company by another; the purchase may be for assets, a definable segment of another entity, or the purchase of an entire company.

Related Terms: Acquisition method 

Acquisition method
A method of accounting for a business combination where the acquirer is required to measure each identifiable asset and liability at fair value. This method was the result of a joint project of the IASB and the FASB aiming at convergence in standards for the accounting of business combinations.

Related Terms: Acquisition Acquiring company 

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

Related Terms: Active risk Active risk squared 

Active management
An approach to investing in which the portfolio manager seeks to outperform a given benchmark portfolio.

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

Active risk
The standard deviation of active returns.

Synonyms: tracking risk tracking error
Related Terms: Tracking error Tracking risk 

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

Related Terms: Active factor risk Active risk 

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

Synonyms: asset selection risk
Related Terms: Active risk Active risk squared 

Active strategy
In reference to short-term cash management, an investment strategy characterized by monitoring and attempting to capitalize on market conditions to optimize the risk and return relationship of short-term investments.

Active/immunization combination
A portfolio with two component portfolios: an immunized portfolio which provides an assured return over the planning horizon and a second portfolio that uses an active high-return/high-risk strategy.

Related Terms: Active management 

Active/passive combination
Allocation of the core component of a portfolio to a passive strategy and the balance to an active component.

Related Terms: Active management 

The portion of a pension fund’s liabilities associated with active workers.

Activity ratios
Ratios that measure how efficiently a company performs day-to-day tasks, such as the collection of receivables and management of inventory.

Synonyms: asset utilization ratios operating efficiency ratios

Actual extreme events
A type of scenario analysis used in stress testing. It involves evaluating how a portfolio would have performed given movements in interest rates, exchange rates, stock prices, or commodity prices at magnitudes such as occurred during past extreme market events (e.g., the stock market crash of October 1987).

Ad valorem fees
Fees that are calculated by multiplying a percentage by the value of assets managed; also called assets under management (AUM) fees.

Related Terms: AUM fee 

Addition rule for probabilities
A principle stating that the probability that A or B occurs (both occur) equals the probability that A occurs, plus the probability that B occurs, minus the probability that both A and B occur.

Add-on interest
A procedure for determining the interest on a bond or loan in which the interest is added onto the face value of a contract.

Adjusted beta
Historical beta adjusted to reflect the tendency of beta to be mean reverting.

Related Terms: Beta 

Adjusted present value
As an approach to valuing a company, the sum of the value of the company, assuming no use of debt, and the net present value of any effects of debt on company value.

Synonyms: APV
Related Terms: Valuation 

Adjusted R2
A measure of goodness-of-fit of a regression that is adjusted for degrees of freedom and hence does not automatically increase when another independent variable is added to a regression.

Adverse selection risk
The risk associated with information asymmetry; in the context of trading, the risk of trading with a more informed trader.

Agency costs
Costs associated with the conflict of interest present when a company is managed by non-owners. Agency costs result from the inherent conflicts of interest between managers and equity owners.

Related Terms: Agency costs of equity 

Agency costs of equity
The smaller the stake that managers have in the company, the less is their share in bearing the cost of excessive perquisite consumption or not giving their best efforts in running the company.

Related Terms: Agency costs 

Agency problem
A conflict of interest that arises when the agent in an agency relationship has goals and incentives that differ from the principal to whom the agent owes a fiduciary duty.

Synonyms: principal–agent problem agency issue
Related Terms: Fiduciary 

Aging schedule
A breakdown of accounts into categories of days outstanding.

Related Terms: Account 

Algorithmic trading
Automated electronic trading subject to quantitative rules and user-specified benchmarks and constraints.

Allocation/selection interaction return
A measure of the joint effect of weights assigned to both sectors and individual securities; the difference between the weight of the portfolio in a given sector and the portfolio’s benchmark for that sector, times the difference between the portfolio’s and the benchmark’s returns in that sector, summed across all sectors.

Allowance for bad debts
An offset to accounts receivable for the amount of accounts receivable that are estimated to be uncollectible.

The return on an asset in excess of the asset’s required rate of return; the risk-adjusted return.

Synonyms: abnormal return risk-adjusted return

Alpha and beta separation
An approach to portfolio construction that views investing to earn alpha and investing to establish systematic risk exposures as tasks that can and should be pursued separately.

Alpha research
Research related to capturing excess risk-adjusted returns by a particular strategy; a way investment research is organized in some investment management firms.

Related Terms: Alpha 

Alternative investments
Groups of investments with risk and return characteristics that differ markedly from those of traditional stock and bond investments.

American option
An option that can be exercised at any time until its expiration date.

Related Terms: Option European option 

The process of allocating the cost of intangible long-term assets having a finite useful life to accounting periods; the allocation of the amount of a bond premium or discount to the periods remaining until bond maturity.

Amortizing and accreting swaps
A swap in which the notional principal changes according to a formula related to changes in the underlying.

Synonyms: accreting swaps
Related Terms: Swap contract 

Analysis of variance
The analysis of the total variability of a dataset (such as observations on the dependent variable in a regression) into components representing different sources of variation; with reference to regression, ANOVA provides the inputs for an F-test of the significance of the regression as a whole.

Synonyms: ANOVA

Anchoring trap
The tendency of the mind to give disproportionate weight to the first information it receives on a topic.

Angel investor
An accredited individual investing chiefly in seed and early-stage companies.

Annual percentage rate
The cost of borrowing expressed as a yearly rate.

A finite set of level sequential cash flows.

Annuity due
An annuity having a first cash flow that is paid immediately.

Anticipation stock
Excess inventory that is held in anticipation of increased demand, often because of seasonal patterns of demand.

With reference to a transaction or a security, one that would increase earnings per share (EPS) or result in EPS higher than the company’s basic EPS. Antidilutive securities are not included in the calculation of diluted EPS.

(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.

Arbitrage opportunity
An opportunity to conduct an arbitrage; an opportunity to earn an expected positive net profit without risk and with no net investment of money.

Related Terms: Arbitrage 

Arbitrage portfolio
The portfolio that exploits an arbitrage opportunity.

Related Terms: Arbitrage Arbitrage opportunity 

Arithmetic mean
The sum of the observations divided by the number of observations.

Arrears swap
A type of interest rate swap in which the floating payment is set at the end of the period and the interest is paid at that same time.

Asian call option
A European-style option with a value at maturity equal to the difference between the stock price at maturity and the average stock price during the life of the option, or $0, whichever is greater.

Related Terms: Option European option 

Ask price
The price at which a dealer will sell a specified quantity of a security.

Synonyms: ask offer price offer
Related Terms: Ask size 

Ask size
The quantity associated with the ask price.

Related Terms: Ask price 

Asset allocation reviews
A periodic review of the appropriateness of a portfolio’s asset allocation.

Asset beta
The unlevered beta; reflects the business risk of the assets; the asset’s systematic risk.

Related Terms: Beta 

Asset covariance matrix
The covariance matrix for the asset classes or markets under consideration.

Asset purchase
An acquisition in which the acquirer purchases the target company’s assets and payment is made directly to the target company.

Related Terms: Acquisition 

Asset swap
Converts the periodic fixed coupon of a specific bond to a Libor plus or minus a spread.

Related Terms: Swap contract 

Asset/liability management
The management of financial risks created by the interaction of assets and liabilities.

Related Terms: Asset/liability management approach 

Asset/liability management approach
In the context of determining a strategic asset allocation, an asset/liability management approach involves explicitly modeling liabilities and adopting the allocation of assets that is optimal in relationship to funding liabilities.

Related Terms: Asset/liability management 

Asset-based loan
A loan that is secured with company assets.

Asset-based valuation
An approach to valuing natural resource companies that estimates company value on the basis of the market value of the natural resources the company controls.

Related Terms: Valuation 

Asset-only approach
In the context of determining a strategic asset allocation, an approach that focuses on the characteristics of the assets without explicitly modeling the liabilities.

Resources controlled by an enterprise as a result of past events and from which future economic benefits to the enterprise are expected to flow.

Assignment of accounts receivable
The use of accounts receivable as collateral for a loan.

Assurity of completion
In the context of trading, confidence that trades will settle without problems under all market conditions.

Assurity of the contract
In the context of trading, confidence that the parties to trades will be held to fulfilling their obligations.

Asymmetric information
The differential of information between corporate insiders and outsiders regarding the company’s performance and prospects. Managers typically have more information about the company’s performance and prospects than owners and creditors.

A discrepancy in the dating of observations that occurs because stale (out-of-date) data may be used in the absence of current data.

At the money
An option in which the underlying value equals the exercise price.

Related Terms: Option Moneyness Out-of-the-money 

AUM fee
A fee based on assets under management; an ad valorem fee.

Related Terms: Ad valorem fees 

The correlation of a time series with its own past values.

Automated Clearing House
An electronic payment network available to businesses, individuals, and financial institutions in the United States, U.S. territories, and Canada.

Automated trading
Any form of trading that is not manual, including trading based on algorithms.

Autoregressive model
A time series regressed on its own past values in which the independent variable is a lagged value of the dependent variable.

Synonyms: AR model

Available-for-sale investments
Debt and equity securities not classified as either held-to-maturity or fair value through profit or loss securities. The investor is willing to sell but not actively planning to sell. In general, available-for-sale securities are reported at fair value on the balance sheet.

Average effective spread
A measure of the liquidity of a security’s market. The mean effective spread (sometimes dollar weighted) over all transactions in the stock in the period under study.