CIMA flashcards

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

Future Value Formula

FV = PV x (1 + r)^n, where r is the periodic rate and n the number of periods; compounding grows an initial amount at a constant rate.

Real Return

The inflation-adjusted return, computed as (1 + nominal)/(1 + inflation) - 1 and approximated by nominal minus inflation; it measures the change in purchasing power.

Geometric Mean Return

The compounded average return, calculated as the nth root of the product of (1 + each period return), minus one; it never exceeds the arithmetic mean.

Beta

Covariance of an asset's returns with market returns divided by market variance; it measures systematic risk, with the market at 1.0 and cash at zero.

Market-Cap Weighted Index

Weights each constituent by price times shares outstanding, so large companies dominate; it needs no rebalancing for price moves and adjusts automatically for splits.

Gordon Growth Model

P0 = D1/(r - g): a stock's value equals next year's dividend divided by the required return minus constant growth, and is valid only when g is below r.

Leading P/E Ratio

Price divided by next year's expected earnings; under constant growth it equals the payout ratio divided by (r - g), the required return minus growth.

Modified Duration

Macaulay duration divided by (1 + yield/periods per year); it approximates the percentage price change of a bond for a one percent change in yield.

Convexity Adjustment

Second-order price sensitivity to yield: price change is approximately -modified duration x change in yield + 0.5 x convexity x (change in yield)^2, improving accuracy for large moves.

Yield to Maturity

The single discount rate that equates a bond's price to the present value of its coupons and principal, assuming coupons are reinvested at that same rate.

Call Option Payoff

For the buyer at expiry, payoff is max(0, S - K); the premium paid is the maximum loss, while upside is unlimited as the underlying rises.

Loss Aversion

Prospect theory result that losses feel roughly twice as painful as equivalent gains, causing investors to reject fair bets and hold losing positions too long.

Disposition Effect

The tendency to sell profitable positions too early to lock in gains while holding losing positions to avoid realising a loss.

Overconfidence Bias

Overestimating the precision of one's forecasts and knowledge; it typically produces excessive trading, concentrated portfolios and underestimation of downside risk.

Anchoring

Fixating on an initial reference value such as a purchase price or a past index level, and adjusting insufficiently when new information arrives.

Representativeness Bias

Judging probabilities by how closely an outcome resembles a stereotype, leading investors to extrapolate recent strong performance as if it will persist.

Mental Accounting

Treating money as belonging to separate buckets by source or purpose, which violates fungibility and produces inconsistent risk taking across accounts.

Efficient Frontier

The set of risky portfolios offering the highest expected return for each level of risk; portfolios below it are inefficient given the available assets.

Capital Market Line

A line from the risk-free rate through the tangency portfolio showing expected return against total risk for efficient portfolios mixing the market with cash.

Security Market Line

CAPM graph of expected return versus beta; assets plotting above the line are undervalued with positive alpha, while those below are overvalued.

Two-Fund Separation

With a risk-free asset, every efficient portfolio mixes cash and the same tangency portfolio; only the proportions change with the investor's risk aversion.

Diversification Benefit

Portfolio volatility falls below the weighted average of asset volatilities whenever correlation is less than one, with the greatest benefit at negative correlation.

Minimum-Variance Portfolio

The leftmost point on the efficient frontier; the asset mix with the lowest attainable standard deviation, regardless of the expected return it delivers.

Time-Weighted Return

A return that geometrically links sub-period returns, stripping out the effect of external cash flows; the standard measure for comparing manager performance.

Money-Weighted Return

The internal rate of return on a portfolio including the size and timing of contributions and withdrawals; it reflects the investor's actual dollar-weighted experience.

Treynor Ratio

Excess return over the risk-free rate divided by beta; a reward-to-systematic-risk measure suited to portfolios that form part of a larger diversified fund.

Information Ratio

Active return relative to a benchmark divided by tracking error; it measures how much value a manager adds per unit of active risk taken.

Investment Policy Statement

A written document setting the client's return and risk objectives, constraints, governance and review process; it anchors all subsequent portfolio decisions and communication.

Implementation Shortfall

The gap between returns on a hypothetical paper portfolio and the actual portfolio, capturing delay, execution and opportunity costs of implementing a trade.

High-Water Mark

A performance fee provision under which the manager is paid only on gains above the highest prior value, so earlier losses must be recovered first.

Best Execution

The duty to obtain the most favourable overall terms for client trades, weighing price, speed, and likelihood of execution and settlement, not commission alone.

Risk Tolerance

The combination of a client's financial capacity to absorb losses and psychological willingness to accept them; the lower of the two governs portfolio risk.