CAIA Level I flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Fiduciary Duty

A legal obligation to act solely in the beneficiary's best interest, comprising duties of loyalty, care, and prudence, and requiring conflicts to be avoided or disclosed.

Material Nonpublic Information

Information that could move a security's price and is not publicly available; trading or tipping on it is prohibited, so professionals must disclose it publicly or abstain.

Conflicts of Interest Disclosure

Professionals must disclose actual or potential conflicts to clients and employers and manage them so client interests are not compromised; disclosure alone may not cure a conflict.

GIPS Composite

A grouping of all actual, fee-paying, discretionary portfolios managed to a similar strategy, used so that performance is presented fairly and without cherry-picking.

J-Curve Effect

The pattern in which private fund returns are negative early, when fees and unrealized losses dominate, then rise as investments mature and are sold.

High-Water Mark

A threshold requiring that an incentive fee be charged only on gains above the previous peak net asset value, preventing repeat fees on recovered losses.

Illiquidity Premium

The extra expected return investors demand for holding assets that cannot be sold quickly without a price concession, common in private equity and private real estate.

Two and Twenty

A standard alternative investment fee structure of a 2% management fee on assets plus a 20% incentive fee on profits, often subject to a hurdle and high-water mark.

CAPM

A model stating that expected return equals the risk-free rate plus beta times the market risk premium, so only systematic risk is priced by the market.

Modified Duration

A bond's percentage price change for a 1% change in yield, equal to Macaulay duration divided by one plus the yield divided by compounding frequency.

Sharpe Ratio

Excess return over the risk-free rate divided by the standard deviation of returns; it measures reward per unit of total portfolio risk.

Semi-Strong Market Efficiency

The form in which prices reflect all publicly available information, including financial statements and news, so fundamental analysis cannot consistently earn abnormal returns.

Value at Risk

The maximum expected loss at a stated confidence level over a specified horizon; it says nothing about the size of losses beyond that threshold.

Expected Shortfall

The average loss conditional on losses exceeding the VaR threshold; a coherent tail-risk measure that captures the severity of losses beyond VaR.

Risk Parity

Portfolio construction that sizes positions so each asset contributes equally to total portfolio risk, rather than equalizing dollar weights across holdings.

Tracking Error

The standard deviation of the difference between portfolio and benchmark returns, measuring how closely a manager's returns follow the benchmark.

Lockup Period

A minimum holding period during which hedge fund investors cannot redeem, giving the manager stable capital to hold illiquid or concentrated positions.

Managed Futures

Professionally managed portfolios trading futures and forwards, often through systematic trend-following, offering diversification and potential crisis alpha against equity drawdowns.

Convertible Arbitrage

A relative value strategy that buys convertible bonds and shorts the underlying stock to hedge equity exposure, capturing mispricing in credit and implied volatility.

Hedge Fund Survivorship Bias

An upward distortion in index returns caused by failed or closed funds being dropped from the database, leaving only surviving funds in the sample.

Vintage Year

The year in which a private fund makes its first capital calls or begins investing, used to compare funds that faced similar market conditions.

DPI Multiple

Distributions to paid-in capital: cumulative cash returned to investors divided by capital contributed, measuring realized private fund performance.

Leveraged Buyout

An acquisition of a company using substantial debt secured by the target's assets and cash flows, with equity returns amplified by deleveraging and operational improvement.

Mezzanine Debt

Subordinated private debt, often carrying warrants or equity participation, that ranks between senior debt and common equity in a company's capital structure.

Cap Rate

Net operating income divided by property value or price; an unlevered income yield used to value real estate and compare it with other assets.

Contango

A futures market where longer-dated contracts trade above near-dated ones, causing negative roll yield for investors holding long futures positions.

Backwardation

A futures market where near-dated contracts trade above longer-dated ones, producing positive roll yield for investors holding long futures positions.

Appraisal Smoothing

Valuation-based real estate returns that lag market movements, understating volatility and correlation with other assets and overstating diversification benefits.

Principal-Protected Note

A structured product combining a zero-coupon bond that returns principal at maturity with an option position providing participation in an underlying asset.

CDO Tranche Subordination

Losses are allocated bottom-up from the equity tranche; junior tranches absorb losses first, shielding senior tranches and providing credit enhancement.

Prepayment Risk

The risk that mortgage borrowers repay early when interest rates fall, returning principal for reinvestment at lower yields and shortening the asset's duration.

Barrier Option

An option that activates as a knock-in or terminates as a knock-out when the underlying touches a specified price, making it cheaper than a standard option.