CFA Level I key terms

A legal and ethical obligation to act in the best interest of another party, placing the client's interests ahead of one's own. In investment management, it underpins loyalty, prudence, and care.

Information that is not widely available to the public and whose disclosure could reasonably affect a security's price or an investor's decision. Trading or communicating it can violate securities laws and ethical standards.

Global Investment Performance Standards: a set of ethical, standardized rules for calculating and presenting investment performance, enabling fair comparison across firms. Firms may claim compliance only after satisfying all requirements.

The sum of a project's expected cash flows discounted to today at a required rate, minus the initial investment. A positive NPV indicates the project is expected to add value.

The discount rate that makes the net present value of an investment's cash flows equal to zero. It is compared with a hurdle rate to decide whether to accept a project.

A statistical measure of the dispersion of returns around their average. Larger values indicate greater volatility and, for a given expected return, greater investment risk.

Also called R-squared, the fraction of the variation in a dependent variable explained by a regression model. It ranges from zero to one; higher values indicate a better fit.

The percentage change in quantity demanded divided by the percentage change in price. Demand is elastic when the absolute value exceeds one and inelastic when it is less than one.

Recurring expansions and contractions in economic activity, measured by output, employment, and income. Cycles vary in length and severity and influence asset returns and policy.

A sustained rise in the general price level, reducing purchasing power. It is often measured by a consumer price index and influences interest rates and central bank policy.

The ability of a country or firm to produce a good at a lower opportunity cost than another producer. It explains gains from specialization and trade even when one party is more efficient overall.

Recording revenues when earned and expenses when incurred, regardless of when cash changes hands. It aims to match economic activity to the periods it affects, improving comparability.

Inventory costing methods. FIFO assigns the oldest costs to cost of goods sold; LIFO assigns the newest. In rising prices, LIFO usually produces lower reported profit and lower inventory value.

A balance sheet item representing taxes owed in future periods because of temporary differences between accounting and tax rules, such as accelerated tax depreciation.

A framework that decomposes return on equity into net profit margin, asset turnover, and financial leverage, helping analysts identify the drivers of profitability and risk.

The weighted average of a company's after-tax cost of debt and cost of equity, using target capital structure weights. It represents the minimum return required by providers of capital.

The process of evaluating long-term investment projects, using tools such as net present value, internal rate of return, and payback period to decide which projects to undertake.

The use of debt or fixed financial costs to finance assets. It magnifies both returns and losses to shareholders and increases the risk of financial distress.

An estimate of what an asset is truly worth based on fundamentals such as cash flows, growth, and risk, independent of its current market price.

A valuation approach that estimates a stock's intrinsic value as the present value of expected future dividends, often assuming a constant growth rate.

The theory that security prices quickly and fully reflect available information, making consistent risk-adjusted outperformance difficult. It comes in weak, semi-strong, and strong forms.

Price per share divided by earnings per share. It shows how much investors pay for each dollar of earnings and is used in relative valuation and market comparisons.

The annual return an investor would earn by buying a bond at its current price and holding it to maturity, assuming all coupons are reinvested at that same rate.

A measure of a bond's price sensitivity to changes in interest rates, expressed in years for Macaulay duration. Higher duration means greater price volatility for a given rate change.

A measure of how a bond's duration changes as interest rates change, capturing the curvature of the price-yield relationship. Positive convexity generally benefits bondholders when yields move.

The difference between the yield on a risky bond and the yield on a comparable government bond. It compensates investors for default risk, liquidity risk, and other factors.

A private agreement between two parties to buy or sell an asset at a specified future date and price. It is customizable but carries counterparty risk and typically no upfront payment.

A contract giving the holder the right, but not the obligation, to buy an underlying asset at a set price on or before expiration. The buyer pays a premium and has limited loss.

A relationship between the prices of a European call, a European put, the underlying asset, and a risk-free bond with the same strike and expiration, used to check for arbitrage.

A pooled investment vehicle that uses flexible strategies, including leverage, derivatives, and short selling, and typically charges performance fees while facing limited regulation and liquidity.

Investment in companies that are not publicly traded, often involving buyouts, venture capital, or growth capital. Positions are illiquid and long-term, with active management.

A company that owns income-producing real estate and distributes most of its taxable income to shareholders, offering liquidity and diversification benefits compared with direct property ownership.

Combining assets whose returns are not perfectly correlated to reduce portfolio risk without necessarily lowering expected return.

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

A model that prices an asset based on its sensitivity to market risk, beta: expected return equals the risk-free rate plus beta times the market risk premium.

A measure of an asset's sensitivity to movements in the market portfolio. A beta above one indicates greater volatility than the market; below one indicates less.