CFA® glossary: A

50 terms beginning with A.

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Ability to take risk

The objective half of risk tolerance, set by time horizon, wealth relative to spending needs and liabilities, and the stability of income. Enthusiasm does nothing to raise it. Where it appears →

Abnormal return

The return beyond what an asset's risk would lead one to expect. It is what an efficiency test looks for, and it is only as good as the model of expected return behind it.

Accrual accounting

Recording revenue when it is earned and costs when they are incurred, whatever the cash is doing. It is what lets a period's accounts describe the period's trading rather than its banking.

Accrual fraction

The length of an interest period as a fraction of a year, such as 90/360. It scales an annual rate into the interest actually paid for that period. Where it appears →

Accrual ratio

Accruals scaled by average net operating assets, measured from the change in net operating assets or as net income minus operating and investing cash flow. Higher ratios suggest less persistent earnings. Where it appears →

Accrued interest

The slice of the next coupon the seller has earned by holding the bond up to the settlement date. The buyer advances it and collects the whole coupon later, so it is a transfer between them rather than a cost. Where it appears →

Accrued liabilities

Expenses recognised but not yet paid, such as wages or interest owed at the period end. An increase means the expense charged exceeded the cash paid for it.

Acquisition method

The accounting for business combinations: the acquiree's identifiable assets and liabilities are measured at fair value, and any excess of the price over them is recorded as goodwill.

Active return

The portfolio's return minus the benchmark's return. In a factor model it splits into a part from active factor exposures and a part from security selection. Where it appears →

Active risk

The standard deviation of active return, also called tracking error. Its square splits into active factor risk and active specific risk. Where it appears →

Active share

The share of a portfolio's holdings that differs from its benchmark's: half the sum of the absolute differences in weights. It measures how different the holdings are; tracking error measures how differently they behave. Where it appears →

Activist short seller

An investor who shorts a share and then publishes research arguing it is overvalued, sometimes alleging fraud. Paid by the fall rather than by being right, so every claim needs checking against the filings.

Additional compensation arrangement

Under Standard IV(B), any gift, benefit or payment that competes with, or could reasonably be expected to create a conflict with, the employer's interest. It needs written consent from all parties involved first. Where it appears →

Adverse opinion

An audit opinion that the statements are not fairly presented, because misstatements are both material and pervasive. The most serious conclusion an auditor can reach on accounts it has examined.

Affirmative covenant

A promise in the loan agreement about what the borrower will do — pay on time, insure the assets, deliver audited accounts. Where it appears →

After-tax return

The return left after tax on income and realised gains, the only return a taxable investor can spend. Tax is charged on the nominal return, so inflation is taken out afterwards, not before. Where it appears →

Aggregate demand

Total planned spending on an economy's output at each price level: consumption, investment, government spending and net exports. It shifts with wealth, expectations, policy and foreign demand. Where it appears →

Algorithmic trading

Computer programs executing trades under pre-set rules, often splitting a large order into small pieces to limit its market impact. Speed and consistency are what it adds, not judgement.

Allocationally efficient

Describes a financial system in which capital reaches its most productive uses. It is the point of the system, and it depends on prices being informative.

Allowance for loan losses

A reserve against a bank's loans for credit losses expected but not yet written off, built up through provisions. Measured against non-performing loans, it shows how well losses are covered.

Altman z-score

A bankruptcy-risk score weighting five ratios: working capital, retained earnings, EBIT and sales, each over total assets, and market equity over liabilities. A lower score means greater risk of distress.

American option

An option that can be exercised at any time up to expiry. Worth at least as much as the equivalent European option; in a binomial tree it is valued with a check for exercise at each node. Where it appears →

Analysis of variance

Splitting the total variation in the dependent variable into the part a regression explains and the residual part. Its table gives the sums of squares from which R², the standard error and the F-statistic follow. Where it appears →

Annualising

Restating a return earned over one period as the equivalent rate per year, by compounding rather than multiplying, so returns over different horizons can be compared. It magnifies noise as much as return. Where it appears →

Annuity

A level payment made every period for a fixed number of periods, in its ordinary form at the end of each. Its value is a perpetuity less the perpetuity that would have begun after the final payment. Where it appears →

Annuity due

An annuity paying at the start of each period rather than the end. Every payment arrives a period sooner, so it is worth the ordinary annuity multiplied by one plus the rate.

Annuity factor

The sum of the discount factors for a series of payment dates: the present value of one unit paid on each. It turns a difference in rates into the value of a swap or swaption.

Anomaly

A persistent pattern in returns that an efficient market should have removed. Before treating it as mispricing, rule out data mining, trading costs and a risk the model has missed. Where it appears →

Antidilutive

A convertible security that would raise earnings per share if converted. Its holder would not convert, so it is left out of the diluted figure.

Appraisal

Valuing an asset by expert estimate, usually from comparable transactions, rather than by an observed trade. Appraised values lag and smooth the true series, so volatility and correlation are understated. Where it appears →

Appraisal ratio

Jensen's alpha divided by the volatility of the residual, non-systematic return: the abnormal return earned for each unit of the unsystematic risk taken to earn it. Where it appears →

Appraisal smoothing

Reported values of unlisted assets moving less than true values, because appraisals are periodic and anchored on the last one. It makes private holdings look less volatile than they are.

Arbitrage

Buying and selling equivalent things at different prices for a profit that carries no risk. Its existence is what forces prices into line. Where it appears →

Arbitrage pricing theory

A model in which expected return is the risk-free rate plus a premium for each of several factor sensitivities, derived from the absence of arbitrage. Unlike the CAPM, it does not name the factors. Where it appears →

Arbitrage-free

Priced so that no riskless profit is available from combining it with other instruments. An arbitrage-free rate tree or model is one fitted to reproduce the market prices of benchmark bonds. Where it appears →

Arrival price

The mid-quote when an order reaches the trader. The natural benchmark for urgent orders, because every price move from that moment counts against the execution. Where it appears →

Asset location

Deciding which account holds which asset, rather than what to own. Where income is taxed more heavily than deferred gains, tax-inefficient assets such as bonds belong in tax-advantaged accounts. Where it appears →

Asset manager code

CFA Institute's code of conduct for firms rather than individuals, setting out what an organisation managing client money should do. Adopting it is voluntary but all or nothing, and the claim must be made in the prescribed form.

Asset-backed securities

Securities repaid from a pool of non-mortgage loans or receivables — auto loans, credit card balances, student loans — held by a separate entity. Their structure follows how those loans repay. Where it appears →

Asset-based approach

Valuing a business as the fair value of its assets less its liabilities. Suits holding and resource companies and those likely to be liquidated, not firms whose worth lies in intangibles. Where it appears →

At the money

An option whose exercise price equals the current price of the underlying. Exercising now would yield nothing, but uncertainty about the outcome is greatest here, and so is time value. Where it appears →

Autarky

A country pursuing self-sufficiency, trading and cooperating as little as possible, often with the state directing key industries. It gives up the gains from trade in exchange for control.

Authorised participant

A dealer permitted to create and redeem ETF shares with the fund, usually in exchange for baskets of the underlying securities. Their arbitrage keeps the ETF's price close to net asset value. Where it appears →

Autocorrelation

The correlation of a series, or of a model's residuals, with its own past values at a given lag. Significant residual autocorrelations show a time-series model is misspecified. Where it appears →

Automatic stabiliser

Taxes and transfers, such as income tax and unemployment benefits, that move against the cycle without any decision being taken. They act at once, which discretionary policy cannot.

Autoregressive conditional heteroskedasticity

Error variance in a time-series model that depends on the size of past errors, so volatile periods cluster. Where present, standard errors are unreliable, but the variance itself can be modelled and forecast. Where it appears →

Autoregressive model

A time-series model that explains a variable by its own past values; an AR(p) model uses p lags. Its estimates and tests are valid only if the series is covariance stationary. Where it appears →

Availability payment

A payment by a public authority to the operator of an infrastructure asset for keeping it available to an agreed standard, whatever the usage. It removes demand risk, leaving performance and counterparty risk.

Average total cost

Total cost, fixed and variable, per unit of output. Price equal to it is the breakeven point, and in the long run price must cover it or the firm exits.

Average variable cost

Variable cost per unit. In the short run a firm should keep producing while price covers it, because each unit then contributes towards fixed costs owed anyway; below it, the firm should shut down.