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

Paired comparisons test
A statistical test for differences based on paired observations drawn from samples that are dependent on each other.

Related Terms: Paired observations 

Paired observations
Observations that are dependent on each other.

Pairs arbitrage trade
A trade in two closely related stocks involving the short sale of one and the purchase of the other.

Pairs trade
A basic long–short trade in which an investor is long and short equal currency amounts of two common stocks in a single industry.

Synonyms: Pairs arbitrage

Panel data
Observations through time on a single characteristic of multiple observational units.

Panel method
A method of capital market expectations setting that involves using the viewpoints of a panel of experts.

A descriptive measure computed from or used to describe a population of data, conventionally represented by Greek letters.

Parameter instability
The problem or issue of population regression parameters that have changed over time.

Parametric test
Any test (or procedure) concerned with parameters or whose validity depends on assumptions concerning the population generating the sample.

Partial correlation
In multivariate problems, the correlation between two variables after controlling for the effects of the other variables in the system.

Partial fill
Execution of a purchase or sale for fewer shares than was stipulated in the order.

Partial regression coefficients
The slope coefficients in a multiple regression.

Synonyms: partial slope coefficients

Participate order
A variant of the market-not-held order. The broker is deliberately low-key and waits for and responds to the initiatives of more active traders.

Synonyms: do not initiate order
Related Terms: Market-not-held order Broker 

A business owned and operated by more than one individual.

Passive investment approach
A buy-and-hold approach to investing in which an investor does not make portfolio changes based on short-term expectations of changing market or security performance.

Passive management
A buy-and-hold approach to investing in which an investor does not make portfolio changes based upon short-term expectations of changing market or security performance.

Passive strategy
In reference to short-term cash management, it is an investment strategy characterized by simple decision rules for making daily investments.

Passive traders
Traders that seek liquidity in their rebalancing transactions but are much more concerned with the cost of trading.

Payer swaption
A swaption that allows the holder to enter into a swap as the fixed-rate payer and floating-rate receiver.

Payment date
The day that the company actually mails out (or electronically transfers) a dividend payment.

Synonyms: Payable date

Payment netting
A means of settling payments in which the amount owed by the first party to the second is netted with the amount owed by the second party to the first; only the net difference is paid.

The value of an option at expiration.

Payout ratio
The percentage of total earnings paid out in dividends in any given year (in per-share terms, DPS/EPS).

Pecking order theory
The theory that managers take into account how their actions might be interpreted by outsiders and thus order their preferences for various forms of corporate financing. Forms of financing that are least visible to outsiders (e.g., internally generated funds) are most preferable to managers and those that are most visible (e.g., equity) are least preferable.

The P/E-to-growth ratio, calculated as the stock’s P/E divided by the expected earnings growth rate.

Pension surplus
Pension assets at market value minus the present value of pension liabilities.

Per unit contribution margin
The amount that each unit sold contributes to covering fixed costs—that is, the difference between the price per unit and the variable cost per unit.

A method of revenue recognition in which, in each accounting period, the company estimates what percentage of the contract is complete and then reports that percentage of the total contract revenue in its income statement.

Percentage-of-portfolio rebalancing
Rebalancing is triggered based on set thresholds stated as a percentage of the portfolio’s value.

Percentage-of-volume strategy
A logical participation strategy in which trading takes place in proportion to overall market volume (typically at a rate of 5–20 percent) until the order is completed.

Quantiles that divide a distribution into 100 equal parts.

Perfect markets
Markets without any frictional costs.

Performance appraisal
The evaluation of risk-adjusted performance; the evaluation of investment skill.

Performance attribution
A comparison of an account’s performance with that of a designated benchmark and the identification and quantification of sources of differential returns.

Performance evaluation
The measurement and assessment of the outcomes of investment management decisions.

Performance measurement
The calculation of returns in a logical and consistent manner. A component of performance evaluation; the relatively simple procedure of calculating an asset's or portfolio's rate of return.

Performance netting risk
For entities that fund more than one strategy and have asymmetric incentive fee arrangements with the portfolio managers, the potential for loss in cases where the net performance of the group of managers generates insufficient fee revenue to fully cover contractual payout obligations to all portfolio managers with positive performance.

Performance-based fee
Fees specified by a combination of a base fee plus an incentive fee for performance in excess of a benchmark’s.

Related Terms: Benchmark 

Period costs
Costs (e.g., executives’ salaries) that cannot be directly matched with the timing of revenues and which are thus expensed immediately.

Periodic auction markets
Auction markets where multilateral trading occurs at a single price at a prespecified point in time.

Synonyms: batch auction markets

Permanent differences
Differences between tax and financial reporting of revenue (expenses) that will not be reversed at some future date. These result in a difference between the company’s effective tax rate and statutory tax rate and do not result in a deferred tax item.

Permanent income hypothesis
The hypothesis that consumers’ spending behavior is largely determined by their long-run income expectations.

Related Terms: Hypothesis 

An ordered listing.

A perpetual annuity, or a set of never-ending level sequential cash flows, with the first cash flow occurring one period from now.

Related Terms: Annuity 

Pet projects
Projects in which influential managers want the corporation to invest. Often, unfortunately, pet projects are selected without undergoing normal capital budgeting analysis.

Plain vanilla swap
An interest rate swap in which one party pays a fixed rate and the other pays a floating rate, with both sets of payments in the same currency.

Related Terms: Interest rate swap 

Plan sponsor
An enterprise or organization—such as a business, labor union, municipal or state government, or not-for-profit organization—that sets up a pension plan.

Describes a distribution that is less peaked than the normal distribution.

Related Terms: Kurtosis 

Pledging requirement
With respect to banks, a required collateral use of assets.

Point estimate
A single numerical estimate of an unknown quantity, such as a population parameter.

Point of sale
Systems that capture transaction data at the physical location in which the sale is made.

Poison pill
A pre-offer takeover defense mechanism that makes it prohibitively costly for an acquirer to take control of a target without the prior approval of the target’s board of directors.

Related Terms: Dead-hand provision 

Poison puts
A pre-offer takeover defense mechanism that gives target company bondholders the right to sell their bonds back to the target at a prespecified redemption price, typically at or above par value; this defense increases the need for cash and raises the cost of the acquisition.

Policy portfolio
The portfolio resulting from strategic asset allocation considered as a process.

Synonyms: strategic asset allocation
Related Terms: Strategic asset allocation 

Policyholder reserves
With respect to an insurance company, an amount representing the estimated payments to policyholders (as determined by actuaries) based on the types and terms of the various insurance policies issued by the company.

Political risk
The risk of war, government collapse, political instability, expropriation, confiscation, or adverse changes in taxation.

Synonyms: geopolitical risk

Pooling of interests accounting method
A method of accounting in which combined companies were portrayed as if they had always operated as a single economic entity. Called pooling of interests under U.S. GAAP and uniting of interests under IFRS. (No longer allowed under U.S. GAAP or IFRS.)

All members of a specified group.

Population mean
The arithmetic mean value of a population; the arithmetic mean of all the observations or values in the population.

Related Terms: Population 

Population standard deviation
A measure of dispersion relating to a population in the same unit of measurement as the observations, calculated as the positive square root of the population variance.

Related Terms: Population variance 

Population variance
A measure of dispersion relating to a population, calculated as the mean of the squared deviations around the population mean.

Moveable. With reference to a pension plan, one in which a plan participant can move his or her share of plan assets to a new plan, subject to certain rules, vesting schedules, and possible tax penalties and payments.

Portable alpha
A strategy involving the combining of multiple positions (e.g., long and short positions) so as to separate the alpha (unsystematic risk) from beta (systematic risk) in an investment.

Related Terms: Beta 

Portfolio performance attribution
The analysis of portfolio performance in terms of the contributions from various sources of risk.

Portfolio possibilities curve
A graphical representation of the expected return and risk of all portfolios that can be formed using two assets.

Portfolio segmentation
The creation of subportfolios according to the product mix for individual segments or lines of business.

Portfolio trade
A trade in which a number of securities are traded as a single unit.

Synonyms: program trade basket trade

Position a trade
To take the other side of a trade, acting as a principal with capital at risk.

Position trader
A trader who typically holds positions open overnight.

Positive serial correlation
Serial correlation in which a positive error for one observation increases the chance of a positive error for another observation, and a negative error for one observation increases the chance of a negative error for another observation.

Posterior probability
An updated probability that reflects or comes after new information.

Post-trade transparency
Degree to which completed trades are quickly and accurately reported to the public.

Potential credit risk
The risk associated with the possibility that a payment due at a later date will not be made.

Potential output
The value of GDP if the economy were on its trend growth path.

Power of a test
The probability of correctly rejecting the null—that is, rejecting the null hypothesis when it is false.

Precautionary stocks
A level of inventory beyond anticipated needs that provides a cushion in the event that it takes longer to replenish inventory than expected or in the case of greater than expected demand.

Preferred return
With respect to the compensation of private equity fund managers, a hurdle rate.

Prepackaged bankruptcy
A bankruptcy in which the debtor seeks agreement from creditors on the terms of a reorganization before the reorganization filing.

Prepaid expense
A normal operating expense that has been paid in advance of when it is due.

Present value
The present discounted value of future cash flows: For assets, the present discounted value of the future net cash inflows that the asset is expected to generate; for liabilities, the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities.

Synonyms: PV

Present value model
A model of intrinsic value that views the value of an asset as the present value of the asset’s expected future cash flows.

Synonyms: discounted cash flow model
Related Terms: Present value 

Present value of a basis point
The change in the bond price for a 1 basis point change in yield. Also called basis point value (BPV).

Synonyms: price value of a basis point PVBP
Related Terms: Basis point value Present value 

Present value of growth opportunities
The difference between the actual value per share and the no-growth value per share.

Synonyms: value of growth

Presentation currency
The currency in which financial statement amounts are presented.

Pretax margin
A profitability ratio calculated as earnings before taxes divided by revenue.

Pretrade transparency
Ability of individuals to quickly, easily, and inexpensively obtain accurate information about quotes and trades.

Price discovery
Adjustment of transaction prices to balance supply and demand.

Price improvement
Execution at a price that is better than the price quoted at the time of order placement.

Price limits
Limits imposed by a futures exchange on the price change that can occur from one day to the next.

Price momentum
A valuation indicator based on past price movement.

Price multiple
The ratio of a stock’s market price to some measure of value per share.

Price relative
A ratio of an ending price over a beginning price; it is equal to 1 plus the holding period return on the asset.

Price to book value
A valuation ratio calculated as price per share divided by book value per share.

Price to cash flow
A valuation ratio calculated as price per share divided by cash flow per share.

Price to sales
A valuation ratio calculated as price per share divided by sales per share.

Price uncertainty
Uncertainty about the price at which an order will execute.

Price weighted
With respect to index construction, an index in which each security in the index is weighted according to its absolute share price.

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

Price-setting option
The operational flexibility to adjust prices when demand varies from forecast. For example, when demand exceeds capacity, the company could benefit from the excess demand by increasing prices.

Primary risk factors
With respect to valuation, the major influences on pricing.

Prime brokerage
A suite of services that is often specified to include support in accounting and reporting, leveraged trade execution, financing, securities lending (related to short-selling activities), and start-up advice (for new entities).

The amount of funds originally invested in a project or instrument; the face value to be paid at maturity.

Principal amount
Amount that an issuer agrees to repay the debt holders on the maturity date.

Synonyms: Principal value

Principal trade
A trade with a broker in which the broker commits capital to facilitate the prompt execution of the trader’s order to buy or sell.

Prior probabilities
Probabilities reflecting beliefs prior to the arrival of new information.

Private equity
Ownership interests in non-publicly-traded companies.

Private equity funds
Pooled investment vehicles investing in generally highly illiquid assets; includes venture capital funds and buyout funds.

Related Terms: Private equity 

Private exchange
A method for handling undiversified positions with built-in capital gains in which shares that are a component of an index are exchanged for shares of an index mutual fund in a privately arranged transaction with the fund.

Private placement memorandum
A document used to raise venture capital financing when funds are raised through an agent.

A number between 0 and 1 describing the chance that a stated event will occur.

Probability density function
A function with nonnegative values such that probability can be described by areas under the curve graphing the function.

Related Terms: Probability 

Probability distribution
A distribution that specifies the probabilities of a random variable’s possible outcomes.

Related Terms: Probability 

Probability function
A function that specifies the probability that the random variable takes on a specific value.

Related Terms: Probability 

Probit model
A qualitative-dependent-variable multiple regression model based on the normal distribution.

Related Terms: Normal distribution 

The operational flexibility to alter production when demand varies from forecast. For example, if demand is strong, a company may profit from employees working overtime or from adding additional shifts.

Profitability ratios
Ratios that measure a company’s ability to generate profitable sales from its resources (assets).

Profit-sharing plans
A defined-contribution plan in which contributions are based, at least in part, on the plan sponsor’s profits.

Project sequencing
To defer the decision to invest in a future project until the outcome of some or all of a current project is known. Projects are sequenced through time so that investing in a project creates the option to invest in future projects.

Projected benefit obligation
A measure of a pension plan's liability that reflects accumulated service in the same manner as the ABO but also projects future variables, such as compensation increases.

Related Terms: Accumulated benefit obligation (ABO) 

Prospect theory
An alternative to expected utility theory, it assigns value to gains and losses (changes in wealth) rather than to final wealth, and probabilities are replaced by decision weights. In prospect theory, the shape of a decision maker's value function is assumed to differ between the domain of gains and the domain of losses.

Protective put
An option strategy in which a long position in an asset is combined with a long position in a put.

Related Terms: Put 

Proxy fight
An attempt to take control of a company through a shareholder vote.

Proxy hedging
Hedging that involves the use of a forward contract between the home currency and a currency that is highly correlated with the foreign asset’s currency.

Related Terms: Hedging Forward contract 

Proxy statement
A public document that provides the material facts concerning matters on which shareholders will vote.

Prudence trap
The tendency to temper forecasts so that they do not appear extreme; the tendency to be overly cautious in forecasting.

Pseudo-random numbers
Numbers produced by random number generators.

Public good
A good that is not divisible and not excludable (a consumer cannot be denied it).

Pull on liquidity
When disbursements are paid too quickly or trade credit availability is limited, requiring companies to expend funds before they receive funds from sales that could cover the liability.

Purchased in-process research and development costs
The costs of research and development in progress at an acquired company; often, part of the purchase price of an acquired company is allocated to such costs.

Purchasing power gain
A gain in value caused by changes in price levels. Monetary liabilities experience purchasing power gains during periods of inflation.

Purchasing power loss
A loss in value caused by changes in price levels. Monetary assets experience purchasing power losses during periods of inflation.

Purchasing power parity
The theory that movements in an exchange rate should offset any difference in the inflation rates between two countries.

Pure discount instruments
Instruments that pay interest as the difference between the amount borrowed and the amount paid back.

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

Pure sector allocation return
A component of attribution analysis that relates relative returns to the manager’s sector-weighting decisions. Calculated as the difference between the allocation (weight) of the portfolio to a given sector and the portfolio’s benchmark weight for that sector, multiplied by the difference between the sector benchmark’s return and the overall portfolio’s benchmark return, summed across all sectors.

Pure-play method
A method for estimating the beta for a company or project; it requires using a comparable company’s beta and adjusting it for financial leverage differences.

Related Terms: Beta 

An option that gives the holder the right to sell an underlying asset to another party at a fixed price over a specific period of time.

Synonyms: Put option

Put–call parity
An equation expressing the equivalence (parity) of a portfolio of a call and a bond with a portfolio of a put and the underlying, which leads to the relationship between put and call prices

Related Terms: Put Call 

Put–call–forward parity
The relationship among puts, calls, and forward contracts.

Related Terms: Put Call Forward contract