HS 300 flashcards

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

Modified duration

Approximate percentage change in a bond's price for a 1% change in yield, computed as Macaulay duration divided by (1 + yield per period). Higher values mean greater interest-rate sensitivity.

Convexity adjustment

Second-order price change term equal to half of convexity times the squared yield change. It corrects duration estimates and matters most for large yield moves and long-maturity, low-coupon bonds.

Net asset value

Fund assets minus liabilities divided by shares outstanding, calculated at end-of-day prices. Mutual funds transact at NAV; ETFs trade intraday at prices that can differ from NAV.

Enterprise value

Market capitalization plus debt minus cash. Used in EV/EBITDA multiples because it is capital-structure neutral, allowing comparison of firms with different leverage.

Inverted yield curve

A curve where short-term yields exceed long-term yields. It is unusual, historically precedes recessions, and signals expectations of falling rates or near-term economic weakness.

Real versus nominal return

Nominal return is the stated return; real return subtracts inflation (approximately nominal minus inflation). Real return measures purchasing-power growth and drives long-term spending capacity.

Correlation and portfolio risk

Portfolio risk depends on asset weights, volatilities, and pairwise correlations. Correlations below one reduce total variance; negative correlation provides the strongest diversification benefit.

Anti-money laundering

Framework requiring customer due diligence, beneficial ownership identification, transaction monitoring, and suspicious activity reporting to prevent laundering and terrorist financing.

Suitability standard

Requires recommendations be consistent with a client's objectives, risk tolerance, and constraints. It is less demanding than fiduciary duty, which adds loyalty and best-interest obligations.

Material nonpublic information

Information a reasonable investor would find important and that is not publicly available. Trading or tipping on it violates insider-trading rules and firm policies.

Personal account dealing

Firm controls on employee trading, typically pre-clearance, blackout periods around client orders, and minimum holding periods, designed to prevent front-running and conflicts.

Recordkeeping obligations

Regulatory and firm rules requiring retention of client communications, order tickets, and disclosures for a defined period, commonly five to seven years depending on jurisdiction.

Gifts and entertainment limits

Caps on value of gifts or entertainment accepted or given, set by firm policy and regulator guidance. Exceeding limits requires disclosure and approval to avoid improper influence.

Data privacy rules

Requirements limiting sharing of nonpublic personal information with third parties absent notice and opt-out, and mandating safeguards for client data.

Risk tolerance versus capacity

Willingness is psychological comfort with risk; ability is financial capacity to absorb losses. The lower of the two governs the recommended risk level.

Time horizon

The period until funds are needed. Short horizons favor liquidity and capital preservation; long horizons support higher equity exposure because volatility can be absorbed.

Emergency reserve

Liquid funds covering roughly three to six months of expenses, held outside the investment portfolio so long-term assets need not be sold in a crisis.

Concentration risk

Excessive exposure to a single security or sector, often employer stock. Positions above roughly 10-20% of investable assets warrant documented justification and diversification planning.

Investment policy statement

Written document recording objectives, constraints (liquidity, time, tax, legal, unique), target allocation, and review procedures, providing a benchmark for evaluating advice.

Know-your-customer

Process of collecting and verifying identity, financial situation, objectives, and risk tolerance before recommending products, and updating the profile as circumstances change.

Capital market assumptions

Forward-looking estimates of expected return, volatility, and correlation for asset classes, used to build portfolios and set expectations rather than predict short-term outcomes.

Strategic asset allocation

Long-term target weights across asset classes derived from objectives, risk tolerance, and capital market assumptions. It is the primary driver of long-run portfolio behavior.

Tactical asset allocation

Short-term deviations from strategic weights based on market views, bounded by policy limits and documented rationale to prevent drift into unintended risk.

Threshold rebalancing

Rebalancing triggered when a holding drifts outside a preset band (for example plus or minus five percent) rather than on fixed dates, reducing unnecessary trading.

Asset location

Placing tax-inefficient income assets in tax-deferred accounts and tax-efficient equity in taxable accounts to improve after-tax outcomes without changing overall allocation.

Cost drag

Cumulative reduction in returns from fees, expense ratios, spreads, and turnover. Even a one percent annual cost compounds into a material wealth difference over decades.

Withdrawal sequencing

Order in which accounts are drawn in retirement, balancing taxes, required distributions, and longevity risk so the portfolio sustains spending over the client's lifetime.

Fiduciary duty

Obligation of care (competence and diligence) and loyalty (avoid or disclose conflicts and act in the client's best interest), exceeding a mere suitability standard.

Conflict disclosure

Plain-language disclosure of interests that could bias advice, such as commissions or referral fees. Disclosure alone is insufficient if the conflict is not mitigated.

Fair dealing

Treating clients equitably rather than identically, with written allocation policies for trades and new issues so no client is systematically advantaged.

Market manipulation

Prohibited practices such as spoofing, layering, and wash trades that create false impressions of supply, demand, or trading activity.

Confidentiality exceptions

Client information may be shared with consent, when legally compelled, or to prevent fraud or serious harm, consistent with firm policy and applicable law.