IMC flashcards
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32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Sharpe ratio
- Excess portfolio return over the risk-free rate divided by portfolio standard deviation. It measures return per unit of total risk and is used to compare portfolios on a risk-adjusted basis.
- CAPM formula
- Expected return equals the risk-free rate plus beta multiplied by the market risk premium. Beta captures sensitivity to market movements, and only systematic risk is compensated.
- Beta
- A measure of an asset's systematic risk, calculated as the covariance of the asset return with the market return divided by the variance of market returns. Market beta equals one.
- Modified duration
- Macaulay duration divided by one plus the yield per period. It approximates the percentage price change of a bond for a one percentage point change in yield.
- Convexity
- The curvature of the bond price-yield relationship. Positive convexity means price gains from a yield fall exceed price losses from an equal yield rise.
- Gordon growth model
- A dividend discount model valuing a share as next year's dividend divided by the required return minus the constant growth rate. It requires the required return to exceed growth.
- Justified forward P/E
- The payout ratio divided by the required return minus the expected growth rate. It shows the P/E multiple supported by fundamentals rather than the observed market multiple.
- Yield curve inversion
- A downward-sloping yield curve where short-term yields exceed long-term yields. It is often interpreted as a signal of expected recession and falling future rates.
- DuPont decomposition
- Return on equity expressed as net profit margin multiplied by asset turnover multiplied by financial leverage. It isolates profitability, efficiency, and gearing drivers of returns.
- Free cash flow to firm
- Cash available to all capital providers, calculated as operating cash flow minus capital expenditure minus increases in working capital. It underlies discounted cash flow enterprise valuation.
- Current ratio
- Current assets divided by current liabilities. It indicates short-term liquidity, with a ratio below one suggesting current obligations exceed current resources.
- Interest coverage ratio
- Earnings before interest and tax divided by interest expense. It measures how many times operating profit covers interest payments and signals debt-servicing capacity.
- Real interest rate
- The nominal interest rate adjusted for inflation, approximately nominal minus expected inflation. It reflects the true purchasing-power return to a lender or investor.
- Monetary policy transmission
- A policy rate rise raises borrowing costs, dampens demand and inflation, lowers bond prices, and typically strengthens the currency. Rate cuts produce the opposite effects.
- Standard deviation
- A statistical measure of the dispersion of returns around their mean. In finance it is the conventional measure of total risk for an asset or portfolio.
- Diversification benefit
- Combining assets whose returns are imperfectly correlated reduces portfolio variance below the weighted average of individual variances. The benefit grows as correlation falls.
- Value at Risk
- An estimate of the maximum loss over a specified horizon at a given confidence level. It says nothing about the magnitude of losses beyond that threshold.
- Information ratio
- Active return relative to a benchmark divided by tracking error. It measures how efficiently a manager generates excess return per unit of active risk taken.
- Open-ended fund
- A collective investment vehicle that issues and redeems units at net asset value on demand. Unit trusts and OEICs are UK examples with variable capital.
- Investment trust discount
- The amount by which a closed-ended fund's share price trades below its net asset value per share. A premium arises when the share price exceeds NAV.
- Synthetic ETF
- An exchange-traded fund gaining index exposure through derivative swaps rather than holding underlying securities. It introduces counterparty risk but can track indices efficiently.
- Hedge fund fee structure
- Typically a management fee on assets plus a performance fee on gains, often subject to a high-water mark. The structure aligns manager incentives with investment performance.
- Private equity IRR
- The money-weighted return equating committed capital drawdowns and distributions to zero net present value. It reflects actual cash flow timing rather than time-weighted performance.
- Net initial yield
- Annual net rental income divided by the total purchase price including acquisition costs. It is a core income-based valuation metric for investment property.
- FCA Principles for Businesses
- High-level, ever-applicable regulatory obligations covering integrity, skill and care, management and control, financial prudence, market conduct, client interests, and communications.
- Consumer Duty
- An FCA standard requiring firms to deliver good outcomes for retail customers across products, price and value, consumer understanding, and consumer support.
- Market abuse
- Behaviour including insider dealing, unlawful disclosure of inside information, and market manipulation. Inside information is precise, non-public, and price-sensitive.
- Senior Managers and Certification Regime
- A UK accountability regime assigning prescribed responsibilities to senior managers and requiring certification of material-risk and client-facing staff fitness and propriety.
- Suitability assessment
- The process of matching a recommendation to a client's knowledge and experience, financial situation including capacity for loss, and stated investment objectives.
- Capacity for loss
- A client's financial ability to absorb losses without derailing their objectives. It differs from risk appetite, which is the willingness to accept risk.
- GIPS compliance
- Voluntary global standards for calculating and presenting investment performance. Claiming compliance requires presenting at least five years of compliant performance, extending to ten.
- CFA Institute Standards of Practice
- Enforceable ethical standards covering professionalism, capital market integrity, duties to clients and employers, investment analysis, and conflicts of interest.