Cr.FA flashcards

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

Code of Ethics

CFA Institute's foundational statement requiring integrity, competence, diligence, respect, and ethical conduct toward clients, employers, and the profession.

Mosaic Theory

Analyst combines public information with nonmaterial nonpublic information to reach a conclusion; permitted under Standard II(A) as long as no material nonpublic information is used.

Fair Dealing

Standard III(B) requires treating all clients fairly when disseminating investment recommendations or taking investment action, without favoring select clients.

GIPS Composite

Grouping of all actual, fee-paying, discretionary portfolios managed according to the same investment mandate, objective, or strategy for performance presentation.

Accounting Equation

Assets equal liabilities plus shareholders' equity; every transaction preserves this balance, forming the basis of the balance sheet.

LIFO Effect

When prices rise, LIFO shows higher cost of goods sold, lower ending inventory, lower pretax income, and lower taxes than FIFO.

Deferred Tax Liability

Balance sheet item arising when book income exceeds taxable income, such as accelerated tax depreciation, reversing in future periods.

DuPont Analysis

Decomposes return on equity into net profit margin, asset turnover, and financial leverage, revealing which driver generates returns.

Effective Annual Rate

Annualized rate accounting for compounding within the year, computed as (1 + periodic rate)^m minus one.

Growing Perpetuity

Series of cash flows growing at a constant rate forever, valued as PMT divided by the difference between discount rate and growth rate.

CAPM

Required return equals risk-free rate plus beta times the market risk premium; beta measures systematic risk relative to the market.

Type I Error

Rejecting a null hypothesis that is actually true; the probability of this error equals the significance level chosen for the test.

Price Elasticity

Percentage change in quantity demanded divided by percentage change in price; demand is elastic when the absolute value exceeds one.

GDP Expenditure Approach

Gross domestic product equals consumption plus investment plus government spending plus net exports, measuring total domestic output.

Interest Rate Parity

Forward exchange premium or discount equals the interest rate differential between two currencies, preventing riskless arbitrage.

Purchasing Power Parity

Long-run exchange rate theory where identical goods baskets should cost the same across countries after currency conversion.

WACC

Weighted average cost of capital blending after-tax cost of debt and cost of equity using market value weights.

Net Present Value

Sum of discounted project cash flows minus initial outlay; positive NPV indicates the project adds value to shareholders.

Free Cash Flow to Firm

Cash available to all capital providers, computed as EBIT times one minus tax rate, plus depreciation, minus capital expenditures, minus working capital increase.

Gordon Growth Model

Values stock as next dividend divided by the difference between required return and constant growth rate.

Semi-Strong Efficiency

Market prices reflect all publicly available information, so fundamental analysis of public data cannot earn abnormal returns.

EV/EBITDA Multiple

Enterprise value divided by EBITDA; capital-structure neutral and useful for comparing firms with differing leverage and tax positions.

Porter's Five Forces

Framework assessing industry profitability through rivalry, new entrants, substitutes, supplier power, and buyer power.

Modified Duration

Macaulay duration divided by one plus periodic yield; approximates percentage price change for a small change in yield.

Convexity

Second-order measure of bond price sensitivity to yield changes; positive convexity means price gains exceed losses for equal yield moves.

Put-Call Parity

For European options on non-dividend stock, call plus present value of strike equals put plus stock price.

Credit Spread

Difference between a corporate bond yield and a comparable Treasury yield, compensating investors for default and liquidity risk.

Sharpe Ratio

Portfolio excess return over risk-free rate divided by portfolio standard deviation; measures risk-adjusted performance.

Efficient Frontier

Set of portfolios offering maximum expected return for each level of risk; rational investors choose portfolios on this curve.

Investment Policy Statement

Document specifying investor objectives, return and risk targets, constraints, and guidelines governing portfolio management decisions.

Value at Risk

Maximum expected loss over a specified horizon at a given confidence level; does not describe the size of losses beyond that threshold.

Expected Shortfall

Average loss conditional on losses exceeding the VaR threshold; more sensitive to tail risk than VaR alone.

Contango

Futures curve where longer-dated contracts trade above near-dated contracts; rolling positions produces negative roll yield for long holders.