AFA key terms

An aggregation of one or more portfolios managed according to a similar investment mandate, objective, or strategy, for which a firm must present a minimum of five years of performance history.

The practice of combining public and nonmaterial nonpublic information to reach an investment conclusion, which is generally permissible under the CFA Institute Code and Standards.

Information that could affect a security's price and is not yet available to the general market; trading or causing others to trade on it violates professional standards.

An internal information barrier that restricts the flow of confidential or material nonpublic information between departments, such as investment banking and research, within a firm.

An independent third-party review confirming that a firm has complied with the Global Investment Performance Standards for a specific period; it is voluntary and performed by a qualified verifier.

The accrual accounting principle that revenue is recorded when control of promised goods or services transfers to the customer, in an amount reflecting expected consideration.

A method that records revenues when earned and expenses when incurred, regardless of when cash changes hands, matching costs to the periods they benefit.

The degree to which reported net income reflects sustainable, cash-generating operating performance rather than one-time items or aggressive accounting choices.

Cash generated by operations after capital expenditures needed to maintain and grow the asset base, available for distribution to debt and equity holders.

The blended required return on a firm's debt and equity, weighted by their market-value proportions, used as the discount rate for enterprise cash flows.

The process of evaluating long-term investment projects, typically by comparing expected incremental cash flows discounted at an appropriate rate against the initial outlay.

The difference between the present value of a project's expected cash inflows and its initial cost; a positive value indicates the project adds shareholder wealth.

The discount rate that makes a project's net present value equal to zero; a project is acceptable if this rate exceeds the required return.

An equity valuation approach that estimates intrinsic value as the present value of expected future dividends, often assuming a constant growth rate in perpetuity.

A valuation method that values equity as book value plus the present value of expected earnings in excess of the required return on equity.

A fundamental price-to-earnings ratio derived from a valuation model, such as the Gordon growth model, used to compare against a stock's actual multiple.

A measure of a bond's price sensitivity to changes in interest rates, expressed as the approximate percentage price change for a one percent yield change.

A measure of how a bond's duration changes as yields change, capturing the curvature of the price-yield relationship and improving price estimates for large yield moves.

The single discount rate that equates the present value of a bond's promised cash flows to its current price, assuming all payments are made and reinvested at that rate.

The annualized yield on a zero-coupon security maturing at a specific future date, used to discount each individual cash flow of a coupon bond.

An interest rate agreed today for a loan that will begin at a future date, implied by the relationship between current spot rates of different maturities.

A no-arbitrage relationship stating that a fiduciary call and a protective put on the same underlying, strike, and expiration must have equal values.

A strategy combining a long position in an asset with a long put option, which limits downside loss while retaining upside potential.

A position consisting of a long call option plus a risk-free bond that pays the strike price at expiration, replicating the payoff of a protective put.

A risk-adjusted performance measure equal to excess return over the risk-free rate divided by the standard deviation of returns.

A line showing risk-return combinations available by mixing a risky portfolio with the risk-free asset; its slope equals the Sharpe ratio of the risky portfolio.

The set of portfolios offering the highest expected return for each level of risk, or the lowest risk for each expected return, given a universe of risky assets.

Active return divided by tracking error, measuring how much excess return a manager generates per unit of deviation from the benchmark.

The standard deviation of the difference between a portfolio's returns and its benchmark's returns, indicating how closely the portfolio follows the benchmark.

A performance measure that removes the effect of external cash flows by linking subperiod returns, reflecting the manager's investment decisions.

A return measure that accounts for the timing and size of external cash flows, equivalent to the internal rate of return of the portfolio's cash flows.

A statistical result stating that the sampling distribution of the sample mean approaches normality as sample size grows, regardless of the population's distribution.

The standard deviation of a sample statistic's sampling distribution, commonly estimated as the sample standard deviation divided by the square root of sample size.

A range of values, constructed from sample data, expected to contain the true population parameter with a specified probability across repeated sampling.

The percentage change in quantity demanded divided by the percentage change in price; demand is elastic when the absolute value exceeds one.

A good for which demand increases when consumer income rises, producing a positive income elasticity of demand.