CFA® glossary: M

49 terms beginning with M.

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Macaulay duration

The average time to receipt of a bond's cash flows, weighted by present value. Measured in years, and the horizon at which the two rate risks cancel. Where it appears →

Machine learning

Algorithms that infer a rule or pattern from data rather than being programmed with one. A model is judged on how well it performs on data it has not seen. Where it appears →

Macro-hedge

A hedge against a broad risk to the whole portfolio, such as a currency or an equity sell-off, rather than against each exposure separately. Cheaper and simpler, but it will not offset every position exactly.

Management fee

A fee charged as a percentage of committed or invested capital, or of assets, whatever the returns. It pays for running the fund, and a large one can reward gathering assets more than performing. Where it appears →

Mandate

The stated strategy, benchmark and constraints a manager has agreed to run money to. Others build their allocations on it, so departing from it, even for a better idea, breaks the agreement. Where it appears →

Margin call

A demand for further funds when the equity in a margin account falls below the maintenance margin, on a leveraged share purchase or a futures position alike. If it is not met in time, the position is closed out. Where it appears →

Marginal propensity to consume

The share of an extra unit of disposable income that is spent rather than saved. The higher it is, the larger the fiscal multiplier and the less of a tax cut leaks into saving.

Marked to market

Revalued at the current market price, with a futures position's gain or loss settled in cash each day. Credit exposure then never grows beyond a single day's move. Where it appears →

Market approach

Valuing a business from the prices of comparable listed companies or of past acquisitions of similar companies, adjusted for differences in size, growth, risk and control. Where it appears →

Market conversion premium

The excess of a convertible's price over its conversion value, per share or as a ratio to the share price. It is what a buyer pays for the bond's downside protection.

Market impact

The move in price caused by one's own trading as an order uses up the available liquidity. Often the largest cost of a big order, and invisible in the commission. Where it appears →

Market maker

A dealer who stands ready to buy and sell, quoting both prices and taking the other side of trades. It earns the bid–offer spread for holding inventory and its risk; competition among them narrows spreads. Where it appears →

Market order

An order to trade now at whatever the book is showing. It buys certainty of execution at the cost of certainty of price.

Market value added

A company's market value minus the total capital invested in it. Positive when the market expects returns above the cost of capital.

Market-capitalisation-weighted

Weighting each constituent by the market value of its shares. Weights move with prices on their own, so trading is needed only when shares outstanding change, giving the lowest turnover. Where it appears →

Market-neutral

Balancing long and short positions so the portfolio's net exposure to the market, its beta, is close to zero. The return then comes from the spread between the longs and the shorts, not from the market's direction. Where it appears →

Marketability discount

A reduction in value for an interest that cannot readily be sold, as with most private company shares. Reflecting the same risk in the discount rate as well would count it twice. Where it appears →

Marking the close

Trading near the end of a period to set the closing price at which holdings are valued or contracts settled. Size is no defence: a small trade placed to set a mark is manipulation.

Material nonpublic information

Information that would move a price and has not been released to the market generally. Telling a room of analysts is not releasing it. Where it appears →

Materiality

Whether an item is large or relevant enough to change a decision or a valuation. In ESG analysis, which issues are likely to affect a company's cash flows, risk or cost of capital in its particular industry. Where it appears →

Matrix pricing

Estimating the yield of a bond that has not traded by interpolating from comparable issues that have. It assumes away the issuer differences credit analysis exists to find. Where it appears →

Maximum drawdown

The largest fall from a peak to a later trough over a period: the worst loss an investor who bought at the top would have lived through. It depends on the path the sample happened to take. Where it appears →

Mean reversion

The tendency of a variable to move back towards a long-run level after moving away from it. Interest rates, earnings and stationary time series show it; a random walk does not. Where it appears →

Mean–variance optimisation

Choosing asset weights that give the highest expected return for each level of volatility. Highly sensitive to its return inputs, so without constraints it tends to produce concentrated, unstable allocations. Where it appears →

Mental accounting

Treating money differently according to the mental pot it sits in, and ignoring how the pots interact. It produces layered portfolios whose combined risk nobody has looked at.

Method of comparables

Valuing a share by the multiple at which similar firms trade, such as a peer median P/E. It says whether the share is cheap against its peers, not whether the peers are fairly priced. Where it appears →

Method of forecasted fundamentals

Deriving the multiple a share should command from its own expected growth, payout and required return. It ties the multiple to intrinsic value, and is only as good as the forecasts behind it.

Minimum-variance hedge ratio

The hedge ratio that minimises the variance of the hedged position, estimated as the slope from regressing the exposure's returns on those of the hedging instrument. It allows for an imperfect link between the two.

Minimum-variance portfolio

The combination of risky assets with the lowest possible variance: the leftmost point on the curve of possible portfolios, and where the efficient frontier begins. Where it appears →

Misconduct

Wrongdoing in a professional role. Under Standard I(D), conduct involving dishonesty, fraud or deceit, or any act reflecting adversely on professional reputation, integrity or competence, including in private life. Where it appears →

Misrepresentation

Under Standard I(C), knowingly making an untrue or misleading statement, or omitting a fact, about investment analysis, recommendations, actions or other professional activities. Plagiarism is a form of it. Where it appears →

Misspecification

Getting a regression's form or variables wrong, such as omitting an important variable or using levels where logs are needed. Unlike heteroskedasticity, it can bias the coefficients themselves. Where it appears →

Moat

A durable competitive advantage — scale, network effects, switching costs, patents or brands — that stops rivals from competing away a firm's above-average returns.

Model risk

The risk of loss because a model is wrong or wrongly used: a mistaken distribution, bad parameters, or output trusted without checking. More simulation trials do not reduce it; validation and oversight do. Where it appears →

Modern portfolio theory

The framework, from Markowitz, showing that portfolio risk depends on how holdings move together and not only on their individual volatility. It is why assets are judged by their contribution.

Modified duration

The approximate percentage a bond's price moves for a one point change in yield. A straight line drawn against a curve, so it is only good for small moves. Where it appears →

Momentum

Recent winners continuing to outperform, and recent losers to lag, over the following months. A persistent anomaly, explained either as underreaction and herding or as a risk not yet identified. Where it appears →

Monetary policy

A central bank's management of interest rates and the money supply to steer inflation and output. A country with a fixed exchange rate and open capital markets cannot run one of its own. Where it appears →

Money duration

Modified duration multiplied by the full price, so sensitivity is expressed in money. The only form a hedge can actually be transacted in. Where it appears →

Money-weighted return

The internal rate of return on a portfolio's actual cash flows, so it reflects when money was added or withdrawn. The fair measure when the manager, such as a private equity general partner, controls that timing. Where it appears →

Moneyness

Where the underlying price stands against an option's exercise price — in, at or out of the money. It describes only what exercising now would yield, not whether the option is worth its price.

Monopolistic competition

Many sellers of differentiated products with low barriers to entry, giving each a little pricing power. Entry still competes long-run economic profit away to zero. Where it appears →

Monte carlo simulation

Drawing many random scenarios from assumed distributions for a model's uncertain inputs and studying the spread of outcomes. Precise about the consequences of the assumptions, silent on whether they are right. Where it appears →

Mosaic theory

Reaching a conclusion that would move a price by combining public information with non-material private pieces. The analyst built it rather than received it, so it may be used. Where it appears →

Multicollinearity

Two or more independent variables in a regression being highly correlated with one another. Coefficients stay unbiased but their standard errors inflate, so a well-fitting model can show no significant variable. Where it appears →

Multilateralism

Many countries cooperating under shared rules and institutions while staying open to global flows of trade and capital. The world the IMF, World Bank and WTO were built to support.

Multiple expansion

A gain from selling a business at a higher multiple of earnings than was paid for it. It usually reflects market conditions rather than anything the owner did to the business. Where it appears →

Mundell–fleming model

A model of how monetary and fiscal policy affect exchange rates. With mobile capital and a floating rate, tight money with loose fiscal policy strongly appreciates the currency, since both push interest rates up.

Mutual information

How much a token's presence tells about a text's class: zero if it appears equally in every class, nearer one the more it is confined to one class. Used to select features for text classification.