Finance glossary

Jump to a letter

• A
• B
• C
• D
• E
• F
• G
• H
• I
• J
• K
• L
• M
• N
• O
• P
• R
• S
• T
• U
• V
• W
• Y

A

Accrual accountingCFA

Recognising revenue when it is earned and expenses when they are incurred, regardless of when cash moves.

Active shareCFA

The proportion of a portfolio’s holdings that differs from its benchmark, from 0% for an index fund to 100% for no overlap.

Adverse selectionCFAFRM

The problem that arises when the party with better information self-selects into a transaction, leaving the counterparty with the worse…

Agency problemCFAFRM

The conflict that arises when managers act in their own interest rather than that of the owners who employ them.

AlphaCFA

Return in excess of what the asset’s risk exposures would predict.

AnnuityCFA

A series of equal cash flows at equal intervals.

Arbitrage pricing theoryCFAFRM

A model deriving expected returns from exposures to multiple systematic factors, assuming no arbitrage rather than a single market…

Arithmetic meanCFAFRM

The sum of the observations divided by their number.

Asset locationCFA

Deciding which account type holds which asset, so that heavily taxed returns sit in tax-sheltered accounts.

B

BacktestingFRM

Comparing realised losses with the VaR forecasts that preceded them, to check that breaches occur about as often as the confidence level…

Balance sheetCFA

A statement of what a company owns and owes at a single point in time.

Bank runFRM

A self-fulfilling withdrawal of funding from an institution, where the rational individual choice to withdraw first makes failure certain…

Basel AccordsFRM

The international framework for bank capital and liquidity regulation, issued by the Basel Committee on Banking Supervision.

Basis riskCFAFRM

The risk that a hedge and the exposure it hedges do not move together, leaving a residual.

Bayes’ formulaCFA

A rule for revising the probability of an event in the light of new information, using how likely that information is if the event is or…

Behavioural biasCFA

A systematic departure from rational decision-making, either cognitive — an error of reasoning that education can correct — or emotional,…

BetaCFAFRM

The sensitivity of an asset’s return to the market’s return — its share of systematic risk.

Black–Scholes–Merton modelCFAFRM

A closed-form model for European option prices, assuming lognormal prices, constant volatility and continuous frictionless trading.

Book valueCFA

The accounting value of equity: assets less liabilities as reported.

BootstrapCFAFRM

Resampling the observed data with replacement to estimate the sampling distribution of a statistic, without assuming a parametric form.

Bootstrapping (yield curve)CFAFRM

Deriving spot rates sequentially from the prices of coupon bonds, using each solved rate to strip the next.

Business cycleCFA

The recurring pattern of expansion, peak, contraction and trough in economic activity.

Business riskCFAFRM

The uncertainty in operating income arising from the nature of the business itself, before any financing decision.

C

Call optionCFAFRM

The right, without the obligation, to buy an asset at the strike price by expiry.

Callable bondCFA

A bond the issuer may redeem early, usually when rates have fallen.

Capital allocation lineCFA

The set of risk–return combinations available by mixing a risky portfolio with the risk-free asset.

Capital asset pricing modelCFAFRM

A model stating that an asset’s expected return equals the risk-free rate plus beta times the equity risk premium.

Capital budgetingCFA

The process of deciding which long-term investments a company should make.

Capital callCFA

The general partner’s demand that limited partners transfer part of their committed capital.

Capital market lineCFA

The capital allocation line that runs from the risk-free asset to the market portfolio, the steepest available.

Capital structureCFA

The mix of debt and equity a company uses to fund itself.

Capitalisation rateCFA

Net operating income divided by property value — a property’s unlevered income yield.

Carried interestCFA

The general partner’s share of a private fund’s profits, typically around 20%.

Carry tradeCFAFRM

Borrowing in a low interest rate currency to invest in a high interest rate one, profiting if the exchange rate does not move against you.

Cash conversion cycleCFA

The time between paying for inventory and collecting cash from the customer.

Cash flow additivityCFA

The principle that the value of a set of cash flows equals the sum of the values of its parts, so two ways of reaching the same future…

Cash flow from operationsCFA

Cash generated by the core business, before investment and financing.

Central counterpartyFRM

An entity that interposes itself between the two sides of a trade, becoming buyer to the seller and seller to the buyer.

Central limit theoremCFAFRM

For a large enough sample, the distribution of the sample mean approaches normal regardless of the shape of the underlying population.

Code of EthicsCFA

The aspirational statement of how members and candidates should conduct themselves.

Coefficient of determinationCFAFRM

The fraction of the dependent variable’s variation explained by the regression.

Coherent risk measureFRM

A risk measure satisfying monotonicity, subadditivity, positive homogeneity and translation invariance.

CollarCFA

Holding the underlying, buying a put and writing a call, bounding the outcome between a floor and a cap.

CollateralFRM

Assets pledged to secure an exposure, reducing loss if the counterparty defaults.

Common shareCFA

An ownership claim on a company’s residual cash flows and assets, normally carrying a vote and ranking last in liquidation.

CompositeCFA

All portfolios managed to the same strategy or objective, grouped together for GIPS reporting.

Confidence intervalCFAFRM

A range that will contain the true parameter in a stated proportion of repeated samples.

Contango and backwardationCFAFRM

Contango is a futures price above the spot price; backwardation is a futures price below it.

Continuous compoundingCFAFRM

Compounding over infinitely small intervals.

ConvexityCFAFRM

The curvature of the price–yield relationship — how duration itself changes as yields move.

Core inflationCFA

Inflation excluding food and energy prices, which are volatile and often driven by supply rather than demand.

Corporate governanceCFA

The system of controls by which a company is directed and held accountable to its stakeholders.

CorrelationCFAFRM

Covariance divided by the product of the two standard deviations, giving a unit-free number between −1 and +1.

Cost of equityCFA

The return equity holders require for bearing the residual risk of the business.

Counterparty credit riskFRM

The risk that the other side of a derivative defaults before settling, when the contract has positive value to you.

Coupon rateCFA

The annual interest a bond pays, as a percentage of par.

CovarianceCFAFRM

A measure of how two variables move together.

Covered callCFA

Holding the underlying and writing a call against it, collecting the premium in exchange for capping the upside.

Credit default swapCFAFRM

A contract in which the buyer pays a periodic premium and receives compensation if a specified borrower suffers a credit event.

Credit spreadCFAFRM

The extra yield a borrower pays over a risk-free benchmark of the same maturity, compensating for default and liquidity risk.

Credit valuation adjustmentFRM

The reduction in a derivative’s value to reflect the possibility that the counterparty defaults.

Currency hedgingCFA

Using forwards, futures or options to reduce a portfolio’s exposure to exchange rate movements on foreign assets.

Current ratioCFA

Current assets divided by current liabilities, a rough test of short-term solvency.

Current yieldCFA

A bond’s annual coupon divided by its current market price — the cash income it throws off this year per unit invested.

D

Data miningCFAFRM

Searching a dataset repeatedly until a relationship appears, then presenting it as though it had been hypothesised in advance.

Deferred taxCFA

Tax arising from timing differences between accounting profit and taxable profit, recognised as an asset or a liability.

DeltaCFAFRM

The change in an option’s value for a small change in the underlying price.

Delta hedgingCFAFRM

Offsetting an option position with the underlying so the combined position is insensitive to small price moves.

DepreciationCFA

The systematic allocation of a tangible asset’s cost over its useful life.

DerivativeCFAFRM

A contract whose value depends on the price of something else — an asset, a rate, an index or an event.

Derivatives overlayCFA

Adjusting a portfolio’s exposures with derivatives while leaving the underlying holdings untouched.

Diligence and reasonable basisCFA

The requirement that any recommendation or action rest on adequate research and analysis that could be defended if challenged.

Distribution waterfallCFA

The agreed order in which a private fund’s proceeds are shared between limited and general partners.

DiversificationCFAFRM

Combining imperfectly correlated assets so that portfolio risk falls below the weighted average of the individual risks.

Dividend discount modelCFA

Valuing a share as the present value of its expected future dividends.

Dividend policyCFA

How a company decides to return cash to shareholders, and in what form.

DuPont analysisCFA

Decomposing ROE into its drivers — profitability, efficiency and leverage — to identify what is actually moving it.

DurationCFAFRM

The sensitivity of a bond’s price to a change in yield, and equivalently the weighted average time to receiving its cash flows.

DV01CFAFRM

The change in a position’s value for a one basis point change in yield, expressed in currency.

E

Earnings per shareCFA

Net income available to common shareholders, divided by the weighted average shares outstanding.

Earnings qualityCFA

The degree to which reported earnings are sustainable and backed by cash rather than by estimates and one-offs.

EBITDACFA

Earnings before interest, tax, depreciation and amortisation — a rough proxy for operating cash generation.

Economic capitalFRM

The capital a firm judges it needs to absorb unexpected losses at a chosen confidence level, computed internally.

Effective annual rateCFA

The rate that, compounded once a year, gives the same growth as a stated nominal rate compounded more often.

Effective durationCFAFRM

Duration measured by repricing the bond under small parallel shifts in the benchmark curve, so that changes in cash flows are captured.

Efficient frontierCFA

The set of portfolios offering the highest expected return for each level of risk.

Enterprise valueCFA

The value of the whole business regardless of how it is financed: market capitalisation plus debt and minorities, less cash.

Expected lossFRM

The average credit loss anticipated over a horizon.

Expected shortfallFRM

The average loss in the cases where the VaR threshold is breached — the expected size of a bad day, given that it is a bad day.

Exposure at defaultFRM

The amount outstanding when default occurs.

F

Factor investingCFAFRM

Building portfolios around systematic return drivers — value, size, momentum, quality, low volatility — rather than around individual…

Fair dealingCFA

Treating all clients fairly when disseminating recommendations or taking investment action.

Fiduciary dutyCFA

The obligation to act in another party’s interest ahead of your own, with the care and loyalty that relationship demands.

Financial leverageCFA

The use of debt to finance assets, magnifying returns to equity in both directions.

Fiscal policyCFA

Government use of spending and taxation to influence aggregate demand.

Forward contractCFAFRM

A private agreement to buy or sell an asset at a set price on a future date.

Forward rateCFAFRM

The interest rate agreed today for borrowing or lending over a future period, implied by today’s spot curve.

Free cash flowCFA

Cash available after the investment needed to maintain the business.

Free floatCFA

The portion of a company’s shares actually available to public investors, excluding strategic and locked-up holdings.

Front-runningCFA

Trading ahead of a client order to benefit from the price move that order will cause.

Fundamental law of active managementCFA

Expected active return is a function of skill, the number of independent decisions taken, and how fully those decisions are expressed in…

Funding liquidity riskFRM

The risk of being unable to meet obligations as they fall due without incurring unacceptable losses.

Future valueCFA

What a sum invested today grows to by a stated date at a stated rate.

Futures contractCFAFRM

A standardised, exchange-traded forward, marked to market daily through a clearing house.

G

GammaCFAFRM

The rate at which delta changes as the underlying moves.

General partnerCFA

The manager of a private fund, responsible for investment decisions and bearing unlimited liability for the partnership.

Geometric meanCFAFRM

The constant rate that would produce the observed compound growth over the whole period.

GIPSCFA

Voluntary standards for calculating and presenting investment performance, designed so that a prospective client can compare firms on a…

Goals-based investingCFA

Structuring wealth into separate portfolios for separate objectives, each with its own horizon and risk tolerance, rather than one…

GoodwillCFA

The excess of a purchase price over the fair value of the identifiable net assets acquired.

Gross domestic productCFA

The market value of all final goods and services produced within a country in a period.

H

Harmonic meanCFA

The reciprocal of the average of reciprocals.

Hedge fundCFA

A privately offered pooled vehicle with broad freedom over strategy, leverage and short selling.

Hedge fund replicationFRM

Reproducing hedge fund returns using liquid instruments and factor exposures, rather than by paying for the funds themselves.

HeteroskedasticityCFAFRM

Regression errors whose variance is not constant across observations.

High-water markCFA

The highest value an investor’s holding has previously reached, above which incentive fees are charged.

Historical simulationCFAFRM

Estimating VaR by revaluing the current portfolio using actual historical changes in risk factors.

Human capitalCFA

The present value of an individual’s expected future earnings, treated as an asset alongside their financial wealth.

Hurdle rateCFA

The minimum return a fund must deliver before the manager earns an incentive fee.

I

Illiquidity premiumCFAFRM

The extra expected return demanded for holding an asset that cannot be sold quickly at a fair price.

ImmunisationCFA

Structuring a bond portfolio so that price and reinvestment effects cancel, locking in a return over a horizon.

Implementation shortfallCFA

The difference between the return on a paper portfolio and the return actually achieved, capturing delay, market impact, commissions and…

Implied volatilityCFAFRM

The volatility that, put into an option pricing model, returns the option’s observed market price.

Income statementCFA

A statement of revenue, expenses and profit over a period.

Independence and objectivityCFA

The requirement to use reasonable care and judgement to keep independence, and to refuse any gift or pressure that could compromise it.

Index weightingCFA

The rule that decides each member’s influence on an index: by share price, equally, by market capitalisation (optionally counting only…

InflationCFAFRM

A sustained rise in the general price level, reducing the purchasing power of money.

Information ratioCFA

Active return divided by tracking error — value added per unit of benchmark-relative risk.

Initial and variation marginCFAFRM

Initial margin is the good-faith deposit required to open a futures position; variation margin is the daily cash transfer that settles the…

Interest coverage ratioCFAFRM

EBIT divided by interest expense — how many times earnings cover the interest bill.

Interest rate parityCFAFRM

The condition that the forward exchange rate differs from the spot rate by exactly the interest rate differential, so hedged returns are…

Internal rate of returnCFA

The discount rate at which a project’s NPV is zero.

Investment policy statementCFA

The written agreement setting out an investor’s objectives, constraints and the rules the portfolio will be run by.

J

J-curveCFA

The typical shape of a private fund’s returns: negative early, as fees are paid before value is realised, then rising.

K

Key rate durationCFAFRM

Sensitivity to a change in one segment of the yield curve, holding the other segments fixed.

KurtosisCFAFRM

The weight of a distribution’s tails.

L

Leverage ratioFRM

Capital divided by total exposure, without risk weighting — a backstop to the risk-weighted requirement.

Leveraged buyoutCFA

Acquiring a company using a large proportion of borrowed money, secured against the target’s own assets and cash flows.

Liability-driven investingCFA

Managing a portfolio against the liabilities it must fund rather than against a market index.

LIFO and FIFOCFA

Inventory cost-flow assumptions.

Linear regressionCFAFRM

Fitting a straight line through data by minimising the sum of squared residuals, to explain a dependent variable by one or more…

Liquidity coverage ratioFRM

The requirement that a bank holds enough high-quality liquid assets to survive a thirty-day stress scenario.

Liquidity-adjusted VaRFRM

VaR extended to include the cost of closing the position — the bid–ask spread and the market impact of exiting at size.

Lock-up periodCFAFRM

The period during which an investor may not redeem from a fund.

Lognormal distributionCFAFRM

The distribution of a variable whose natural logarithm is normally distributed.

Loss given defaultFRM

The proportion of exposure lost when a borrower defaults, after recoveries.

Loyalty to employerCFA

The duty to act for the employer’s benefit, not to deprive it of your skills, and not to divulge confidential information.

M

Margin (equity trading)CFAFRM

Borrowing from a broker to buy securities, using the securities as collateral.

Marginal VaRFRM

The change in portfolio VaR from a small increase in one position — the position’s contribution to total risk at the margin.

Market capitalisationCFA

Share price multiplied by shares outstanding — the market value of a company’s equity.

Market efficiencyCFA

The proposition that prices already reflect available information, so consistently beating the market on that information is not possible.

Market impactCFAFRM

The adverse price move caused by the act of trading itself.

Market liquidity riskFRM

The risk that a position cannot be sold quickly without moving the price against you.

Market manipulationCFA

Transactions or information intended to distort prices or artificially inflate trading volume, in order to mislead other participants.

Market-capitalisation-weighted indexCFA

An index in which weights are proportional to constituents’ market values.

Material non-public informationCFA

Information that has not been released to the market and that a reasonable investor would want before trading.

Minimum-variance portfolioCFA

The combination of risky assets with the lowest possible variance.

Model riskFRM

The risk of loss from using a model that is wrong, or right but used outside the conditions it was built for.

Modified durationCFAFRM

The approximate percentage change in a bond’s price for a one percentage point change in yield.

Monetary policyCFAFRM

A central bank’s management of money supply and interest rates to pursue price stability and, in some mandates, employment.

Money-weighted returnCFA

The IRR of a portfolio including the timing and size of every contribution and withdrawal.

MoneynessCFA

Whether exercising an option now would pay: in-the-money, at-the-money or out-of-the-money.

Monte Carlo simulationCFAFRM

Estimating a distribution of outcomes by repeatedly drawing random inputs from assumed distributions and recomputing the result.

Moral hazardCFAFRM

The incentive to take more risk once someone else bears the consequences.

Mosaic theoryCFA

Combining public information with non-material non-public information to reach a material conclusion.

MulticollinearityCFAFRM

Two or more independent variables in a regression that are highly correlated.

Multifactor modelCFAFRM

A model explaining returns by exposure to several systematic factors rather than to the market alone.

N

Net present valueCFA

The present value of a project’s cash inflows less the present value of its outflows.

NettingFRM

Offsetting positive and negative exposures with the same counterparty so that only the net amount is at risk.

Neutral rateCFA

The real policy rate that neither stimulates nor restrains the economy when output is at potential.

Normal distributionCFAFRM

A symmetric, bell-shaped distribution fully described by its mean and variance.

Notional principalCFAFRM

The reference amount used to compute a derivative’s payments, which is usually never exchanged.

Null hypothesisCFAFRM

The statement a test assumes true until the data give sufficient reason to reject it.

O

Off-balance-sheet financingCFA

Arrangements that give a company the use of an asset or the benefit of borrowing without showing the liability on its balance sheet.

Operating leverageCFA

The sensitivity of operating income to a change in sales, driven by the proportion of fixed costs.

Operational riskFRM

The risk of loss from failed internal processes, people and systems, or from external events.

Opportunity costCFA

The value of the best alternative given up by choosing one course of action.

Option-adjusted spreadCFAFRM

The spread over the benchmark curve once the value of any embedded option has been stripped out, making bonds with and without options…

Output gapCFA

The difference between actual and potential output, as a percentage of potential.

OverfittingCFA

A model that fits the noise in its training data as well as the signal, so it performs well in-sample and poorly on new data.

P

p-valueCFAFRM

The smallest significance level at which the null could be rejected — the probability of a result at least this extreme if the null were…

Par valueCFA

The amount a bond repays at maturity, and the base on which the coupon is calculated.

Parametric VaRFRM

Estimating VaR from an assumed distribution, usually normal, using the portfolio’s volatility and correlations.

Pecking order theoryCFA

The observation that firms prefer internal funds first, then debt, and issue equity last.

Performance attributionCFAFRM

Decomposing a portfolio’s return relative to its benchmark into the decisions that produced it — typically allocation, selection and…

PerpetuityCFA

An annuity with no end date — a level cash flow received forever.

Preference shareCFA

A share with a stated dividend that ranks ahead of common equity but behind all debt, usually without a vote.

Prepayment riskCFAFRM

The risk that borrowers repay mortgage principal early, most often when rates fall and refinancing becomes attractive.

Present valueCFA

What a future cash flow is worth today, found by discounting it at a rate that reflects its risk and timing.

Price elasticity of demandCFA

The percentage change in quantity demanded for a one percent change in price.

Price-to-earnings ratioCFA

Share price divided by earnings per share.

Price-weighted indexCFA

An index in which each constituent’s weight is proportional to its share price.

Private creditCFAFRM

Lending to companies outside the public bond and syndicated loan markets, usually at floating rates with bespoke covenants.

Private equityCFA

Equity investment in companies that are not publicly traded, typically through a closed-end fund with a fixed life.

Probability of defaultFRM

The likelihood that a borrower fails to meet its obligations over a given horizon.

ProcyclicalityFRM

The tendency of risk measures and capital requirements to loosen in booms and tighten in busts, amplifying the cycle.

Protective putCFA

Holding the underlying and buying a put, which sets a floor under the position at the cost of the premium.

Purchasing power parityCFA

The proposition that exchange rates adjust so that identical goods cost the same across countries.

Put optionCFAFRM

The right, without the obligation, to sell an asset at the strike price by expiry.

Putable bondCFA

A bond the holder may sell back to the issuer early, usually when rates have risen.

Put–call parityCFAFRM

The no-arbitrage relationship linking a European call, a European put, the underlying and a risk-free bond of the same strike and expiry.

R

RAROCFRM

Risk-adjusted return divided by economic capital, used to compare business lines on a like-for-like basis and to price risk.

Real versus nominalCFA

A nominal figure is measured in current prices; a real figure has been adjusted for inflation and so measures actual volume or purchasing…

RebalancingCFA

Trading back to target weights after market moves have shifted them.

Record retentionCFA

The requirement to keep the records supporting analysis, recommendations and actions.

Reinvestment riskCFA

The risk that coupons and principal must be reinvested at a lower rate than expected.

REITCFA

A listed vehicle holding income-producing property, generally required to distribute most of its income to keep favourable tax treatment.

Required rate of returnCFA

The minimum return an investor demands for holding an asset, given its risk.

Return on equityCFA

Net income as a percentage of average shareholders’ equity.

Return smoothingCFAFRM

Understated volatility caused by infrequent or appraisal-based valuations rather than by genuinely stable prices.

RhoCFAFRM

The sensitivity of an option’s value to a change in the risk-free rate.

Risk appetiteFRM

The amount and type of risk a firm is willing to take in pursuit of its objectives, set by the board and cascaded into limits.

Risk budgetingCFAFRM

Allocating a portfolio’s total risk across strategies or managers, rather than allocating its capital.

Risk toleranceCFA

How much risk an investor is both able and willing to take.

Rogue tradingFRM

Unauthorised positions concealed by an employee, typically enabled by weak separation between the front and back office.

Roll yieldCFA

The return from rolling a futures position forward as contracts expire, positive in backwardation and negative in contango.

S

SecuritisationCFAFRM

Pooling loans and issuing securities backed by their cash flows, usually through a bankruptcy-remote special purpose vehicle.

Serial correlationCFAFRM

Regression errors correlated with their own past values.

Share repurchaseCFA

A company buying its own shares, reducing the share count.

Sharpe ratioCFAFRM

Excess return over the risk-free rate, per unit of total risk.

Short sellingCFAFRM

Selling borrowed securities in the expectation of buying them back cheaper.

SkewnessCFAFRM

The asymmetry of a distribution.

Special situationsCFA

Investing around a specific corporate event — restructuring, distress, spin-off or litigation — where the outcome depends more on the…

Spot rateCFAFRM

The yield on a single cash flow received at one future date, with no intervening coupons.

StakeholderCFA

Any party with an interest in the company — shareholders, creditors, employees, customers, suppliers, regulators and the wider community.

Standard deviationCFAFRM

The square root of variance, in the same units as the data.

Standard errorCFAFRM

The standard deviation of a sample statistic, usually of the sample mean.

Standards of Professional ConductCFA

The seven enforceable standards covering professionalism, integrity of capital markets, duties to clients, duties to employers, investment…

Statement of cash flowsCFA

A statement reconciling opening and closing cash, split into operating, investing and financing activities.

StraddleCFA

Buying a call and a put at the same strike and expiry — a position on the size of a move rather than its direction.

Strategic asset allocationCFA

The long-run target mix of asset classes, set from the investor’s objectives and constraints.

Stress testingFRM

Revaluing a portfolio under severe but plausible scenarios, rather than under the distribution of ordinary days.

Style driftCFAFRM

A manager gradually moving away from the strategy the mandate describes.

SuitabilityCFA

The requirement to judge an investment against the client’s objectives, constraints and circumstances before recommending or making it.

Sunk costCFA

A cost already incurred and unrecoverable, and therefore irrelevant to any decision now.

Supervised learningCFA

Machine learning that fits a model to examples with known outcomes — labelled data — so it can predict the outcome for new cases.

Survivorship biasCFAFRM

Distortion caused by studying only the entities that lasted long enough to appear in the sample.

Sustainable growth rateCFA

The rate at which a firm can grow without changing its capital structure or issuing new equity.

SwapCFAFRM

An agreement to exchange one stream of cash flows for another over time.

Systematic riskCFAFRM

Risk affecting the whole market, which cannot be diversified away.

Systemic riskFRM

The risk that the failure of one institution or market propagates through the system as a whole.

T

Tactical asset allocationCFA

Short-term deliberate deviation from the strategic allocation to exploit a perceived opportunity.

Tax-loss harvestingCFA

Realising losses deliberately to offset gains elsewhere, while keeping the portfolio’s economic exposure broadly intact.

ThetaCFAFRM

The change in an option’s value from the passage of one day, all else equal.

Time value of moneyCFA

The principle that a sum available today is worth more than the same sum later, because today’s sum can be invested.

Time-weighted returnCFA

The compound growth of one unit of currency in a portfolio, with the effect of external cash flows removed by chain-linking sub-period…

Tracking errorCFA

The standard deviation of the difference between portfolio and benchmark returns.

TrancheCFAFRM

One slice of a securitisation with a defined priority of payment, so that losses hit the junior slices before the senior ones.

Treynor ratioCFA

Excess return per unit of systematic risk, using beta in the denominator.

Two and twentyCFA

The classic alternative fee model: an annual management fee of around 2% of assets plus around 20% of profits.

Type I errorCFAFRM

Rejecting a true null hypothesis.

Type II errorCFAFRM

Failing to reject a false null hypothesis.

U

Unexpected lossFRM

The volatility of credit losses around the expected level, which economic capital is held to absorb.

Unsupervised learningCFA

Machine learning that finds structure in data without a target variable, for example by grouping similar observations into clusters.

Unsystematic riskCFAFRM

Risk specific to one company or sector, which diversification can remove.

V

Value at RiskCFAFRM

The loss that will not be exceeded over a stated horizon with a stated confidence — for example, a 1-day 99% VaR of £1m means losses…

VarianceCFAFRM

The average squared deviation from the mean — the standard measure of dispersion.

VegaCFAFRM

The change in an option’s value for a one point change in implied volatility.

Venture capitalCFA

Equity investment in early-stage companies with high failure rates and highly skewed outcomes.

Vintage yearCFA

The year a private fund makes its first investment, and the basis on which its performance is compared with peers.

W

Wealth transferCFA

Moving assets to the next generation or to charity, structured for tax efficiency and for the family’s intentions.

Weighted average cost of capitalCFA

The blended required return on a company’s capital, weighting each source by its share of the total at market value.

Working capitalCFA

Current assets less current liabilities — the short-term capital tied up in operations.

Working capital managementCFA

Managing receivables, payables, inventory and cash so the business has liquidity without tying up more capital than it needs.

Wrong-way riskFRM

Exposure to a counterparty that rises precisely as that counterparty’s creditworthiness falls.

Y

Yield curveCFAFRM

The relationship between yield and maturity for bonds of the same credit quality.

Yield curve strategyCFA

Positioning a bond portfolio for an expected change in the shape of the curve — bullet, barbell or ladder structures expressing different…

Yield to maturityCFAFRM

The single discount rate that equates a bond’s price to the present value of its cash flows.