Cr.FA key terms

A firm's formal claim that it has met all requirements of the Global Investment Performance Standards, including input data, calculation methodology, composite construction, disclosures, and presentation rules. Compliance is firm-wide, voluntary, and verified only if the firm also hires a verifier.

A structured process for resolving conduct dilemmas: identify the facts and stakeholders, note relevant laws, standards, and firm policy, weigh duties to clients and markets, consider alternatives and consequences, act, then document and review. It supplements, not replaces, the Code and Standards.

The duty to avoid relationships, compensation, or gifts that could bias research or recommendations. Analysts must distinguish fact from opinion, disclose conflicts to clients and employers, and restrict gifts and entertainment to amounts unlikely to influence judgment.

Assembling material nonpublic information from individually immaterial public fragments and analysis, without breaching a duty of trust. The resulting conclusion may be acted upon if no confidentiality obligation was violated in gathering it.

Information whose disclosure would likely move a security's price and that has not been disseminated to the market. Trading or causing others to trade on it breaches the standards when the information was obtained in violation of a duty.

The accrual principle governing when revenue is recorded: when performance obligations are satisfied and control of goods or services transfers to the customer, at an amount reflecting expected consideration, adjusted for variable amounts and financing components.

Recording economic events when they occur rather than when cash moves. Revenues are matched with the expenses incurred to generate them, producing accruals and deferrals that separate reported earnings from operating cash flow.

The degree to which reported earnings reflect sustainable operating performance and are supported by cash flows, rather than one-off items, accounting estimates, or aggressive accrual choices. High quality earnings persist and are less likely to reverse.

An eight-variable probit model that flags possible earnings manipulation using ratios such as days sales in receivables, gross margin, asset quality, sales growth, depreciation, SG&A, leverage, and accruals. Scores above roughly minus 1.78 suggest elevated manipulation risk.

Decomposing return on equity into net profit margin, total asset turnover, and financial leverage (equity multiplier). It shows whether returns come from profitability, operating efficiency, or borrowing, and supports trend and peer comparison.

Cash available to all capital providers after reinvestment: net operating profit after tax plus noncash charges minus capital expenditure and increases in working capital. Discounting it at the weighted average cost of capital gives enterprise value.

The blended required return on a firm's debt and equity, weighted by their market-value proportions and adjusted for the tax shield on interest. It is the discount rate for cash flows of comparable risk.

A measure of a security's sensitivity to movements in the market portfolio, computed as the covariance of its returns with market returns divided by market variance. It drives the capital asset pricing model's required return.

A model stating expected return equals the risk-free rate plus beta times the market risk premium. It prices only systematic risk, assuming diversified investors, and underlies cost of equity and performance benchmarking.

The graphical relation between expected return and beta under the capital asset pricing model. Assets plotting above the line appear undervalued, below it overvalued, and its slope equals the market risk premium.

The average return in excess of that predicted by the capital asset pricing model given the portfolio's beta. A positive value indicates outperformance after adjusting for systematic risk, though it may reflect luck or model error.

Active return divided by tracking error, measuring return per unit of active risk relative to a benchmark. Higher values indicate more consistent skill; it is preferred to the Sharpe ratio when the benchmark is the relevant comparison.

The standard deviation of the difference between portfolio and benchmark returns, capturing dispersion of active returns. Low values suit index-like mandates; high values suit active mandates with wider permitted deviations.

The principle that money available today is worth more than the same amount later because it can earn a return. It underpins present value, future value, annuity, and discounting calculations throughout valuation.

The sum of expected cash flows discounted at the required rate of return, minus the initial outlay. A positive value adds shareholder wealth and is the preferred capital budgeting criterion when projects are independent.

The discount rate that makes a project's net present value zero. It can mislead when comparing mutually exclusive projects or when cash flow signs alternate, producing multiple or no solutions.

A measure of a bond's price sensitivity to yield changes, expressed in years for Macaulay duration and as a percentage price change for modified duration. Longer maturity and lower coupons raise duration.

The curvature of the price-yield relationship, capturing how duration itself changes as yields move. Positive convexity means price gains exceed losses for equal yield moves, so investors accept lower yield for it.

The yield premium of a risky bond over a comparable government bond, compensating for default, recovery, and liquidity risk. Spreads widen in stress and narrow in risk-on markets, driving relative value decisions.

The proposition that exchange rates adjust so identical goods cost the same across countries. Absolute parity compares price levels; relative parity links exchange rate changes to inflation differentials, a long-run anchor rather than a short-run predictor.

The condition that the forward exchange premium or discount equals the interest rate differential between two currencies, preventing riskless arbitrage. Covered parity uses contracted forward rates; uncovered parity relies on expected spot rates.

Compensation combining a management fee on assets and an incentive fee, often 20 percent, on profits, frequently subject to a high-water mark and hurdle. Fee terms materially reduce net returns and shape manager risk-taking.

The extra expected return investors demand for holding assets that cannot be sold quickly without a price concession. It appears in private equity, real estate, and small-cap securities and is hard to separate from manager skill.

Upward distortion in measured performance caused by excluding funds or firms that failed or closed. It inflates average returns and understates risk, especially in hedge fund and small-cap databases.

Distortion from adding a fund's prior good performance to a database only after it begins reporting. Combined with survivorship bias, it overstates index returns and smooths reported volatility.

The proposition that prices rapidly incorporate available information. Weak form covers past prices, semi-strong covers public information, and strong form covers all information including private, implying limited scope for persistent excess returns.

Study of how cognitive errors and emotional biases cause investors to deviate from rational utility maximization. It explains anomalies such as overconfidence, loss aversion, anchoring, and herding, and informs portfolio and client advice.

An intrinsic valuation approach pricing a share as the present value of expected future dividends. The Gordon growth version assumes a constant growth rate below the required return; multistage versions handle changing growth.

The estimated value of all cash flows beyond the explicit forecast horizon, often computed with a perpetuity growth or exit multiple. It frequently dominates total valuation, so its assumptions deserve scrutiny.

The maximum loss expected over a stated horizon at a given confidence level under normal conditions. It says nothing about losses beyond the threshold, which is why expected shortfall and stress testing accompany it.

Evaluating portfolio or firm losses under specified extreme scenarios, such as rate shocks, credit crises, or liquidity freezes. It complements statistical risk measures by revealing tail exposures and concentrated vulnerabilities.

A written agreement defining objectives, return and risk targets, constraints, and governance for a portfolio. It anchors asset allocation, sets rebalancing and monitoring rules, and helps advisers manage client expectations.

The long-term mix of asset classes chosen to meet an investor's objectives and constraints, typically derived from capital market expectations and rebalanced periodically. It explains most of a portfolio's return variability over time.

A grouping of all actual, fee-paying, discretionary portfolios managed to the same strategy, used for performance presentation. Firms must define inclusion rules in writing and include all eligible portfolios to avoid cherry-picking.