CFA® glossary: T

58 terms beginning with T.

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T distribution

A symmetric distribution like the normal but with fatter tails, shaped by its degrees of freedom. Used for inference about a mean when the population variance is unknown, and it approaches the normal as the sample grows. Where it appears →

T-test

A test of a mean using the t distribution, the right choice when the population variance is unknown and has to be estimated from the sample, as it almost always is. Where it appears →

Tactical asset allocation

Deliberate short-term departures from the strategic weights to exploit a view on relative value or the cycle. It adds active risk and trading costs, so it is judged against the strategic allocation it departs from.

Takahashi–alexander model

A projection model for a private fund's capital calls, distributions and net asset value over its life, driven by a few parameters such as the rate of calls, the growth rate and the pace of distributions.

Take rate

The share of each transaction's value a platform keeps as revenue. Revenue is gross merchandise value multiplied by it, so a small change in it matters as much as volume does.

Tangency portfolio

The risky portfolio where a line from the risk-free rate just touches the efficient frontier. It has the highest Sharpe ratio available, so investors sharing the same expectations all hold it. Where it appears →

Target debt ratio

The share of new investment a company plans to fund with borrowing. Used to forecast net borrowing in FCFE, so that debt funds that share of capital spending and working capital growth.

Target payout adjustment model

A model of stable dividends in which each year's increase closes a fixed fraction of the gap between the target payout on this year's earnings and last year's dividend.

Target price

The price an analyst expects a share to reach, usually within twelve months. Typically forecast earnings times a chosen multiple, so it inherits the uncertainty of both. Where it appears →

Tax drag

How far taxes reduce a portfolio's growth compared with what it would have earned untaxed. Tax paid every year compounds the loss, so deferring the same tax can leave noticeably more. Where it appears →

Tax residence

The country whose tax system treats a person as resident, usually decided by days present or personal ties. In most systems it, not citizenship, decides where income is taxed, so a new passport alone rarely changes the bill. Where it appears →

Tax shield

The tax saved because interest is deductible: interest paid times the tax rate. It is why debt can lower the weighted average cost of capital, until expected distress costs outweigh it. Where it appears →

Tax-advantaged account

An account in which investment returns escape tax or have it deferred, such as a tax-deferred or tax-exempt retirement account. Holding the least tax-efficient assets there saves the most. Where it appears →

Tax-deferred account

An account funded with pre-tax money that grows untaxed, with tax paid on withdrawal. It beats a tax-exempt account when the tax rate at withdrawal is lower than the rate today. Where it appears →

Tax-exempt account

An account funded with money already taxed, whose growth and withdrawals are free of tax. It does as well as a tax-deferred account when the tax rates now and at withdrawal are equal, and better if the later rate is higher.

Tax-loss harvesting

Selling holdings at a loss to realise losses that offset taxable gains. It saves tax now, but lowers the cost basis of whatever replaces them, so much of the benefit is deferral. Where it appears →

Taylor rule

A guide to where the policy rate should sit: the neutral real rate plus expected inflation, plus half the gap between expected and target inflation and half the output gap. A rate above it signals tight policy. Where it appears →

Ted spread

Three-month Libor minus the three-month Treasury bill yield, formerly a gauge of bank credit risk. Libor has since been discontinued.

Temporal method

Remeasuring foreign statements with monetary items at the current rate and non-monetary items at historical rates, taking the gains and losses to net income. Used when the subsidiary's functional currency is the parent's. Where it appears →

Tender offer

An offer to buy shares from existing holders, usually at a premium to the market price, for a stated number of shares within a limited time. In a buyback it is made at a fixed price or as a Dutch auction.

Term premium

The extra yield investors demand for holding a long bond rather than rolling over short ones, above expected future short rates. It tends to rise with maturity and with inflation uncertainty. Where it appears →

Term structure models

Models of how the short rate evolves. Equilibrium models such as CIR and Vasicek derive the curve from assumed dynamics; arbitrage-free models such as Ho–Lee fit today's curve exactly.

Term structure of credit spreads

Credit spreads for one issuer or rating plotted against maturity. For strong credits it usually slopes upward; for distressed ones it can invert, because default risk is concentrated in the near term.

Terminal value

The value, at the end of an explicit forecast, of everything that follows — usually from a constant growth formula. It often supplies most of the total, so its growth assumption deserves the most scrutiny. Where it appears →

Test statistic

The figure computed from the sample to decide a hypothesis test, typically the distance between the estimate and the hypothesised value in standard errors. It is compared with a critical value.

Tf–idf

Term frequency times inverse document frequency: a word's weight in a text, high when it is frequent there but rare across the collection. It favours informative words over common ones.

Theta

The change in an option's value as time passes, other things equal. Usually negative for a long option, which is what time decay means.

Threat of new entrants

How easily newcomers can enter an industry and compete its profits away. Low where barriers such as scale, capital requirements or regulation are high; one of Porter's five forces. Where it appears →

Threat of substitutes

Products meeting the same need in a different way, which cap the price an industry can charge. One of Porter's five forces, and easy to miss because substitutes come from outside the industry. Where it appears →

Three lines of defence

A risk governance structure: the business units that own and manage risk, independent risk and compliance functions that oversee them, and internal audit that checks both, all answering to the board.

Timberland

Forest land held for its timber. Return comes from biological growth, timber prices and the land itself, and the harvest can be postponed when prices are poor, because the trees keep growing. Where it appears →

Time decay

The loss of an option's value as expiry approaches, other things equal, measured by theta. It usually works against the holder of an option and in favour of the writer. Where it appears →

Time-series momentum

Trend following: going long assets whose own recent returns are positive and short those whose returns are negative. Unlike cross-sectional momentum, each asset is compared only with its own past.

Time-weighted return

The compound growth of one unit over the period, linking returns between external cash flows so their timing and size have no effect. The standard measure for a manager who does not control the flows. Where it appears →

Token

The unit a language model reads and writes: a word or a piece of one. The model generates text by estimating probabilities for the next token, picking one and repeating. Where it appears →

Tokenisation

Splitting text into units, usually words, called tokens: the first step in preparing text for a model. With digital assets the same word means representing ownership of an asset as a token on a ledger. Where it appears →

Tolerance band

The range around a target weight within which drift is allowed. A breach triggers rebalancing, which avoids both constant trading and unlimited drift. Where it appears →

Total factor productivity

The part of output growth not explained by more labour or capital: technology, organisation, institutions. Measured as a residual, and the only source of growth not subject to diminishing returns.

Total firm assets

Under GIPS, the fair value of all the discretionary and non-discretionary assets a firm manages, including those in no composite. Reported so a composite's size can be seen against the whole firm. Where it appears →

Total probability rule

Building an unconditional expected value or probability by weighting each scenario's conditional figure by that scenario's probability. The scenarios must be mutually exclusive and exhaustive.

Total return swap

A swap in which one party receives the total return on a reference asset, income plus price change, and pays a fixed or floating rate. It gives the economic exposure without owning the asset. Where it appears →

Tracking difference

The gap between an ETF's return and its index's return over a period, usually negative because of fees and costs. Tracking error measures how much that gap varies.

Trade credit

Credit suppliers extend by allowing payment some days after delivery. It carries no stated interest, but passing up an early-payment discount can make it one of the dearest sources of short-term funding.

Trade diversion

Imports switching from an efficient outside producer to a costlier member of a trading bloc only because tariffs between members have gone. Unlike trade creation, it lowers welfare.

Trailing p/e

A multiple using the last twelve months of reported earnings. Factual, but backward-looking and distorted by any one-off item in that year. Where it appears →

Tranche

A slice of a securitisation with its own place in the queue for losses or for principal. Subordination is what lets ordinary loans support a high rating. Where it appears →

Transaction costs

The costs of trading — commissions, bid-ask spreads and market impact. Prices need only be efficient to within them, since a mispricing too small to trade profitably will not be corrected. Where it appears →

Transaction price

The amount a seller expects to be entitled to for what it has promised, including estimated variable consideration. It is allocated across the performance obligations by their standalone selling prices. Where it appears →

Transfer coefficient

The correlation between the active weights a manager would like to hold and those actually held, between zero and one. Constraints such as long-only lower it, and cut the information ratio in proportion. Where it appears →

Translation adjustment

The gain or loss from translating a foreign subsidiary under the current rate method, taken to other comprehensive income and accumulated in equity, not net income, until the subsidiary is sold. Where it appears →

Treasury stock method

How options are counted in diluted earnings per share: assume exercise, assume the proceeds buy shares back, and add only the net new shares. Where it appears →

Triangular arbitrage

A riskless profit when a dealer's quoted cross rate differs from the one implied by two other currency pairs: buy the currency where it is cheap, sell it where it is dear, and route through the third. Where it appears →

Tvpi

Total value to paid-in capital: DPI plus RVPI, a private fund's distributions and remaining value together per unit paid in. A multiple, so it ignores how long the money was tied up.

Twap

Time-weighted average price: the average price over a period, with every interval counted equally whatever the volume. A benchmark, and an algorithm, for spreading an order evenly through time. Where it appears →

Two-fund separation

The result that choosing a portfolio splits into two decisions: which risky portfolio to hold, the same for everyone, and how much to lend or borrow alongside it, which depends on risk aversion.

Two-tailed test

A test whose alternative is that a parameter differs from a value in either direction, so the rejection region is split between both tails. The choice of tails is made before seeing the data.

Type i error

Rejecting a null hypothesis that is actually true. Its probability is the significance level, which the analyst chooses, and tightening that level makes Type II errors more likely. Where it appears →

Type ii error

Failing to reject a null hypothesis that is actually false. One minus its probability is the power of the test, and it becomes more likely as the significance level is tightened. Where it appears →