CIMA key terms

The idea that a dollar received today is worth more than a dollar received later because it can be invested to earn a return. It underlies compounding and discounting in finance.

The return on an investment after subtracting inflation, showing the change in purchasing power. It is distinct from nominal return, which includes the effect of inflation.

The return available from an investment with no default risk, often represented by short-term government securities. It is the baseline for comparing risky investments and discounting cash flows.

A statistical measure of how widely returns vary around their average. In investing, it is a common measure of total risk or volatility.

A statistic between -1 and +1 that indicates how two investments move in relation to each other. It is used to judge diversification potential.

A chart showing the yields of bonds with the same credit quality but different maturities. Its shape reflects expectations about interest rates and economic conditions.

A measure of how much a bond's price is likely to change when interest rates move, expressed in years. Higher duration means greater interest-rate sensitivity.

The practice of dividing a portfolio among asset classes such as stocks, bonds, cash, and alternatives. It strongly influences long-term risk and return.

Spreading money across different investments so that poor results in one do not dominate the whole portfolio. It reduces risk when assets do not move together.

Risk that affects the whole market, such as inflation, interest-rate changes, or recessions. It cannot be removed by diversification and is measured by beta.

A number that shows how sensitive an investment is to moves in the overall market. A beta above one means the investment tends to swing more than the market.

The portion of an investment's return not explained by its exposure to the market. It is often used as a measure of a manager's value added.

The theory that security prices quickly incorporate all available information, so consistently beating the market is difficult. It appears in weak, semi-strong, and strong forms.

A model that estimates an asset's expected return from the risk-free rate plus a premium for systematic risk. The premium depends on the asset's beta.

The difference in yield between a bond with credit risk and a government bond of similar maturity. It compensates investors for default and liquidity risk.

The tendency to feel the pain of a loss more strongly than the pleasure of an equal gain. It can cause investors to hold losing positions too long.

A bias in which someone relies heavily on an initial value or estimate when making decisions. Investors may anchor on past prices or forecasts.

The tendency to search for and favor information that supports existing beliefs while disregarding contrary evidence. It can lead to overconfidence and poor decisions.

An exaggerated belief in one's own knowledge or forecasting skill. It often leads to excessive trading, concentrated portfolios, and underestimated risk.

The behavior of following the crowd instead of making independent judgments. In markets, it can intensify rallies and sell-offs.

A behavioral theory describing how people evaluate outcomes as gains or losses relative to a reference point and tend to be loss averse. It challenges traditional expected-utility models.

The tendency to place money into separate mental categories and treat it differently depending on its source or use. It can produce inconsistent financial choices.

A mathematical approach to building portfolios that seeks the highest expected return for a chosen level of risk. It uses expected returns, variances, and correlations.

The collection of portfolios that offer the best possible expected return for each level of risk. Portfolios below it are considered inefficient.

A line that shows the risk-return combinations available by mixing the risk-free asset with the market portfolio. It is used to identify optimal portfolios.

The long-term target mix of asset classes selected to meet an investor's goals and risk tolerance. It is usually documented in the investment policy statement.

Short-term changes to a portfolio's asset mix made to exploit market opportunities. These adjustments stay within limits set by the strategic allocation.

A technique that runs many randomized market scenarios to estimate a range of possible portfolio outcomes. It helps investors judge the probability of meeting goals.

A performance measure that eliminates the effect of external cash deposits and withdrawals. It is used to evaluate how well a manager grew the portfolio.

A return measure that accounts for the size and timing of cash flows into and out of a portfolio. It reflects the actual experience of the investor.

A standard, often a market index, against which a portfolio's performance and risk are compared. A valid benchmark should reflect the portfolio's style and constraints.

A method of breaking down a portfolio's return versus a benchmark into sources such as asset allocation and security selection. It explains why performance differed.

The standard deviation of the gap between a portfolio's returns and those of its benchmark. It shows how actively a portfolio is managed relative to the benchmark.

A ratio that divides active return by tracking error, showing excess return earned per unit of active risk. Higher values indicate more efficient active management.

A written document outlining an investor's objectives, risk tolerance, constraints, and management guidelines. It provides a framework for portfolio decisions and periodic review.

The process of assessing how much risk an investor is willing and able to accept. It considers financial capacity, time horizon, and emotional tolerance for losses.

A legal and ethical obligation to act solely in a client's best interest. It requires loyalty, care, and disclosure of conflicts.

The careful investigation of an investment, manager, or strategy before committing money. It reviews performance, risk, operations, fees, and compliance.