CFA® glossary: R

54 terms beginning with R.

ABCDEFGHIJKLMNOPQRSTUVWYZ0-9

Random forest

An ensemble of decision trees, each grown on a bootstrap sample with a random subset of features, whose predictions are combined by vote or average. Less prone to overfitting than a single tree.

Random walk

A series in which each value equals the previous one plus an unpredictable error, an AR(1) with b1 = 1. It has no finite mean-reverting level and is not covariance stationary. Where it appears →

Razor-and-blade

A business model that sells a durable item cheaply, even at a loss, to profit from repeat sales of the consumables it needs, as with printers and ink cartridges.

Real estate investment trust

A company that owns, and usually operates, income-producing property and pays no corporate income tax provided it distributes most of its taxable income. Equity REITs own property; mortgage REITs hold property loans. Where it appears →

Real estate operating company

A property company that pays ordinary corporate tax, unlike a REIT. In return it can retain earnings and develop, buy or sell property freely rather than distributing most of its income.

Real exchange rate

The nominal exchange rate adjusted for relative price levels, so it measures what one country's goods buy of the other's. It, not the quoted rate, decides competitiveness abroad. Where it appears →

Real option

The right, without the obligation, to change an investment later — to expand, abandon, delay or switch. It has value because the future is uncertain, and a single-scenario NPV leaves it out.

Real return

Return with inflation taken out, so it measures the change in purchasing power. Roughly the nominal return less inflation; exactly, one plus nominal over one plus inflation, less one. Where it appears →

Reasonable basis

Under Standard V(A), the diligent, independent research and investigation a recommendation must rest on. How much is needed rises with how much depends on the analysis. Where it appears →

Rebalancing

Trading back to target weights — a portfolio's policy weights or an index's weighting scheme — after prices have pulled holdings away. Because it sells what has risen, it is contrarian by construction. Where it appears →

Reconstitution

Changing which securities belong to an index, adding and removing members under its rules. The dates are known in advance, so others trade ahead of them and index funds pay for it. Where it appears →

Record date

The date the register of shareholders is fixed to decide who receives a dividend. Trades take time to settle, so a buyer must trade before the ex-dividend date to appear on it.

Recovery rate

The share of an exposure recovered after a default. It falls in the same conditions that cause defaults, which is what makes losses cluster. Where it appears →

Reference rate

The published rate a floating coupon resets to, before the fixed margin is added. Where it appears →

Referral fee

Any compensation, consideration or benefit, cash or not, received from or paid to others for recommending products or services. Standard VI(C) requires it to be disclosed before the client engages the service. Where it appears →

Regime change

A shift in the process generating a series, such as a new policy framework, so that model coefficients differ before and after. Estimating across both blends them and describes neither well.

Relative strength

A momentum indicator comparing a share's return with its own past or with a benchmark's over a period, on the view that recent outperformers tend to keep outperforming.

Remainder trust

A charitable trust that pays income to the family for a period or for life, then passes what remains to a charity. A lead trust reverses the order.

Reporting quality

Whether the statements faithfully describe what happened — a separate question from whether what happened was any good, and the one to settle first. Where it appears →

Required return

The minimum return investors demand for holding an asset, given its risk. It is the discount rate in a valuation, so every value rests on this estimate. Where it appears →

Reserve development

Changes in an insurer's estimates of losses on policies written in past years. Upward revisions show earlier reserves were too thin, and earlier profits overstated.

Residual claim

The right to whatever is left of earnings and assets after every prior claim has been met. It carries all the upside, and is paid last and only if something remains. Where it appears →

Residual income

Net income minus a charge for the cost of equity on opening book value: what is earned after shareholders receive their required return. Positive only when ROE exceeds the cost of equity. Where it appears →

Residual value

What an asset is expected to be worth at the end of its useful life. It is excluded from the amount depreciated, so a higher estimate lowers every year's charge.

Retained earnings

Profits kept in the business rather than paid out. Where net income lands on the balance sheet, which is what ties the statements together. Where it appears →

Retention ratio

The share of earnings kept in the business rather than paid out, one minus the payout ratio. Multiplied by return on equity it gives the sustainable growth rate. Where it appears →

Retrieval-augmented generation

Connecting a language model to a chosen document source by finding the relevant passages first and inserting them into the prompt. Answers stay current and traceable without retraining.

Return objective

What a portfolio must achieve, stated so it can be checked — often a real return tied to spending needs, inflation or a liability. It has to be consistent with the client's risk tolerance. Where it appears →

Return on equity

Profit as a share of what shareholders put in. Two firms reaching the same figure through margin and through borrowing are not the same proposition. Where it appears →

Returns-based style analysis

Inferring a manager's style by regressing the fund's returns on those of style indexes. It needs only the return history, but shows the average exposure over the period and can miss changes within it. Where it appears →

Revaluation

Carrying a long-lived asset at a current value rather than depreciated cost, where the standards allow it. Gains go to equity, not to profit. Where it appears →

Revenue bond

A non-sovereign government bond serviced only from the income of the project it financed — tolls, fees, charges. With no taxing power behind it, it is analysed much like a corporate credit.

Reverse optimisation

Working backwards from market-capitalisation weights, a covariance matrix and a level of risk aversion to the expected returns that would make those weights optimal. A neutral starting point that views can then adjust. Where it appears →

Reverse split

Consolidating shares into fewer, each proportionately dearer, with no change in the company's value. Often used to lift a low price back above an exchange's minimum.

Rho

The change in an option's value for a change in the risk-free rate. Positive for calls and negative for puts, because a higher rate lowers the present value of the strike.

Ricardian equivalence

The argument that households save a debt-financed tax cut in full, anticipating the future taxes needed to repay it, so aggregate demand is unchanged. It holds only under strict assumptions. Where it appears →

Risk aversion

Preferring less uncertainty for the same expected return, and accepting a lower expected return to get it. Its degree differs between investors, and it decides how much risk each chooses to hold. Where it appears →

Risk budgeting

Allocating an organisation's total risk tolerance across activities, so each has a limit before exposure is taken. Best measured by contribution to total risk, which counts how positions interact. Where it appears →

Risk governance

The setting of risk tolerance and accountability by the board and senior management. It must sit above the units taking risk, because a function reporting to those it monitors cannot constrain them.

Risk infrastructure

The people, data and systems needed to measure and monitor risk. Without it, limits set by governance cannot be checked, however carefully they were chosen.

Risk parity

Setting weights so that each asset class contributes the same amount to total portfolio risk. Low-volatility assets such as bonds get large weights, and leverage is often needed to reach a useful return. Where it appears →

Risk reversal

Buying an out-of-the-money option on one side and selling one on the other, such as buying a call and selling a put. Often near zero cost, it expresses a view on direction or on the skew between their implied volatilities.

Risk tolerance

How much risk an investor or organisation can and will bear in pursuit of its objectives. For a client it combines ability and willingness, and where they disagree the lower usually governs. Where it appears →

Risk-free asset

An asset whose return over the period is certain, so it has zero variance and zero covariance with everything else. Mixing it with a risky portfolio traces a straight line in risk–return space.

Risk-free rate

The return on an investment with no default risk over the horizon, usually proxied by short-term government bills. Every risky return is measured against it, and option models discount the exercise price at it. Where it appears →

Risk-neutral probability

The probability of an up move that makes the expected return equal the risk-free rate, used to weight payoffs before discounting at that rate. A computational device, not a forecast. Where it appears →

Risk-weighted assets

A bank's assets with each weighted by its riskiness, so a loan to a weak borrower counts for more than cash or government bonds. The denominator of the regulatory capital ratios. Where it appears →

Robo-adviser

An online service that builds and rebalances a portfolio from a client's answers with little human involvement. Its low cost is what makes small accounts worth serving.

Roll return

What a commodity futures position earns or loses purely from rolling contracts forward as they expire. Over years it can outweigh the price itself. Where it appears →

Rolling down the curve

Buying a bond with a maturity beyond the investment horizon and selling it at the horizon. If an upward-sloping curve stays put, the bond ages into a lower yield, adding a price gain to its coupon income. Where it appears →

Rolling yield

The return a bond portfolio earns if the yield curve stays where it is: yield income plus rolldown return. The part of an expected bond return that needs no view on rates. Where it appears →

Root mean squared error

The square root of the average squared forecast error. Squaring weights large errors heavily; the model with the lower value out of sample is preferred. Also used to judge models with continuous targets. Where it appears →

Row crop

A crop planted and harvested each year, such as wheat or soybeans, so the farmer can switch between crops season by season. More flexible than permanent crops like orchards or vineyards. Where it appears →

Rvpi

Residual value to paid-in capital: a private fund's remaining net asset value divided by the capital paid in. The unrealised part of the multiple, resting on the manager's valuations.