Cfa Level I - 2011 - Glossary Part 05 (G-K)

Front 1

Gains

Back 1

Asset inflows not directly related to the ordinary activities of the business.

Front 2

Game theory

Back 2

A tool that economists use to analyze strategic behavior—behavior that takes into account the expected behavior of others and the recognition of mutual interdependence.

Front 3

Gamma

Back 3

A numerical measure of how sensitive an option’s delta is to a change in the underlying.

Front 4

Generalized least squares

Back 4

A regression estimation technique that addresses heteroskedasticity of the error term.

Front 5

Generational accounting

Back 5

An accounting system that measures the lifetime tax burden and benefits of each generation.

Front 6

Generational imbalance

Back 6

The division of the fiscal imbalance between the current and future generations, assuming that the current generation will enjoy the existing levels of taxes and benefits.

Front 7

Geometric mean

Back 7

A measure of central tendency computed by taking the nth root of the product of n non-negative values.

Front 8

Giro system

Back 8

An electronic payment system used widely in Europe and Japan.

Front 9

Global depository receipt

Back 9

A depository receipt that is issued outside of the company’s home country and outside of the United States.

Front 10

Global minimum-variance portfolio

Back 10

The portfolio on the minimumvariance frontier with the smallest variance of return.

Front 11

Global registered share

Back 11

A common share that is traded on different stock exchanges around the world in different currencies. Golden cross A technical analysis term that describes a situation where a short-term moving average crosses from below a longer-term moving average to above it; this movement is considered bullish.

Front 12

Good-on-close (market on close)

Back 12

An execution instruction specifying that an order can only be filled at the close of trading.

Front 13

Good-on-open

Back 13

An execution instruction specifying that an order can only be filled at the opening of trading.

Front 14

Good-till-cancelled order

Back 14

An order specifying that it is valid until the entity placing the order has cancelled it (or, commonly, until some specified amount of time such as 60 days has elapsed, whichever comes sooner).

Front 15

Goodwill

Back 15

An intangible asset that represents the excess of the purchase price of an acquired company over the value of the net assets acquired.

Front 16

Government debt

Back 16

The total amount that the government has borrowed. It equals the sum of past budget deficits minus the sum of past budget surpluses.

Front 17

Government expenditure multiplier

Back 17

The magnification effect of a change in government expenditure on goods and services on equilibrium expenditure and real GDP.

Front 18

Grant date

Back 18

The day that options are granted to employees; usually the date that compensation expense is measured if both the number of shares and option price are known.

Front 19

Greenmail

Back 19

The purchase of the accumulated shares of a hostile investor by a company that is targeted for takeover by that investor, usually at a substantial premium over market price.

Front 20

Gross profit (gross margin)

Back 20

Sales minus the cost of sales (i.e., the cost of goods sold for a manufacturing company).

Front 21

Gross profit margin

Back 21

The ratio of gross profit to revenues. Grouping by function With reference to the presentation of expenses in an income statement, the grouping together of expenses serving the same function, e.g. all items that are costs of goods sold.

Front 22

Grouping by nature

Back 22

With reference to the presentation of expenses in an income statement, the grouping together of expenses by similar nature, e.g., all depreciation expenses.

Front 23

Growth cyclical

Back 23

A term sometimes used to describe companies that are growing rapidly on a long-term basis but that still experience above-average fluctuation in their revenues and profits over the course of a business cycle.

Front 24

Growth investors

Back 24

With reference to equity investors, investors who seek to invest in high-earnings-growth companies.

Front 25

Growth option or expansion option

Back 25

The ability to make additional investments in a project at some future time if the financial results are strong.

Front 26

Harmonic mean

Back 26

A type of weighted mean computed by averaging the reciprocals of the observations, then taking the reciprocal of that average.

Front 27

Head and shoulders pattern

Back 27

In technical analysis, a reversal pattern that is formed in three parts: a left shoulder, head, and right shoulder; used to predict a change from an uptrend to a downtrend.

Front 28

Hedge fund

Back 28

A historically loosely regulated, pooled investment vehicle that may implement various investment strategies.

Front 29

Hedge funds

Back 29

Private investment vehicles that typically use leverage, derivatives, and long and short investment strategies.

Front 30

Hedge ratio

Back 30

The relationship of the quantity of an asset being hedged to the quantity of the derivative used for hedging.

Front 31

Hedging

Back 31

A general strategy usually thought of as reducing, if not eliminating, risk.

Front 32

Held-for-trading securities (trading securities)

Back 32

Debt or equity financial assets bought with the intention to sell them in the near term, usually less than three months; securities that a company intends to trade.

Front 33

Held-to-maturity investments

Back 33

Debt (fixed-income) securities that a company intends to hold to maturity; these are presented at their original cost, updated for any amortization of discounts or premiums.

Front 34

Herding

Back 34

Clustered trading that may or may not be based on information.

Front 35

Herfindahl–Hirschman Index

Back 35

A measure of market concentration that is calculated by summing the squared market shares for competing companies in an industry; high HHI readings or mergers that would result in large HHI increases are more likely to result in regulatory challenges.

Front 36

Heteroskedastic

Back 36

With reference to the error term of a regression, having a variance that differs across observations.

Front 37

Heteroskedasticity

Back 37

The property of having a non-constant variance; refers to an error term with the property that its variance differs across observations.

Front 38

Heteroskedasticity-consistent standard errors

Back 38

Standard errors of the estimated parameters of a regression that correct for the presence of heteroskedasticity in the regression’s error term.

Front 39

Hidden order

Back 39

An order that is exposed not to the public but only to the brokers or exchanges that receive it.

Front 40

Histogram

Back 40

A bar chart of data that have been grouped into a frequency distribution.

Front 41

Historical cost

Back 41

In reference to assets, the amount paid to purchase an asset, including any costs of acquisition and/or preparation; with reference to liabilities, the amount of proceeds received in exchange in issuing the liability.

Front 42

Historical equity risk premium approach

Back 42

An estimate of a country’s equity risk premium that is based upon the historical averages of the risk-free rate and the rate of return on the market portfolio.

Front 43

Historical method

Back 43

A method of estimating VAR that uses data from the returns of the portfolio over a recent past period and compiles this data in the form of a histogram.

Front 44

Historical exchange rates

Back 44

For accounting purposes, the exchange rates that existed when the assets and liabilities were initially recorded.

Front 45

Historical simulation (or back simulation)

Back 45

Another term for the historical method of estimating VAR. This term is somewhat misleading in that the method involves not a simulation of the past but rather what actually happened in the past, sometimes adjusted to reflect the fact that a different portfolio may have existed in the past than is planned for the future.

Front 46

Holder-of-record date

Back 46

The date that a shareholder listed on the corporation’s books will be deemed to have ownership of the shares for purposes of receiving an upcoming dividend; two business days after the ex-dividend date.

Front 47

Holding period return

Back 47

The return that an investor earns during a specified holding period; a synonym for total return.

Front 48

Holding period yield (HPY)

Back 48

The return that an investor earns during a specified holding period; holding period return with reference to a fixed-income instrument.

Front 49

Homogeneity of expectations

Back 49

The assumption that all investors have the same economic expectations and thus have the same expectations of prices, cash flows, and other investment characteristics.

Front 50

Homogenization

Back 50

Creating a contract with standard and generally accepted terms, which makes it more acceptable to a broader group of participants.

Front 51

Homoskedasticity

Back 51

The property of having a constant variance; refers to an error term that is constant across observations.

Front 52

Horizontal analysis

Back 52

Common-size analysis that involves comparing a specific financial statement with that statement in prior or future time periods; also, cross-sectional analysis of one company with another.

Front 53

Horizontal common-size analysis

Back 53

A form of common-size analysis in which the accounts in a given period are used as the benchmark or base period, and every account is restated in subsequent periods as a percentage of the base period’s same account.

Front 54

Horizontal merger

Back 54

A merger involving companies in the same line of business, usually as competitors.

Front 55

Hostile transaction

Back 55

An attempt to acquire a company against the wishes of the target’s managers.

Front 56

Hurdle rate

Back 56

The rate of return that must be met for a project to be accepted.

Front 57

Hypothesis

Back 57

With reference to statistical inference, a statement about one or more populations.

Front 58

Hypothesis testing

Back 58

With reference to statistical inference, the subdivision dealing with the testing of hypotheses about one or more populations.

Front 59

Iceberg order

Back 59

An order in which the display size is less than the order’s full size.

Front 60

Identifiable intangible

Back 60

An intangible that can be acquired singly and is typically linked to specific rights or privileges having finite benefit periods (e.g., a patent or trademark).

Front 61

If-converted method

Back 61

A method for accounting for the effect of convertible securities on earnings per share (EPS) that specifies what EPS would have been if the convertible securities had been converted at the beginning of the period, taking account of the effects of conversion on net income and the weighted average number of shares outstanding.

Front 62

Immediate or cancel order (fill or kill)

Back 62

An order that is valid only upon receipt by the broker or exchange. If such an order cannot be filled in part or in whole upon receipt, it cancels immediately.

Front 63

Impairment

Back 63

Diminishment in value as a result of carrying (book) value exceeding fair value and/or recoverable value.

Front 64

Impairment of capital rule

Back 64

A legal restriction that dividends cannot exceed retained earnings.

Front 65

Implicit rental rate

Back 65

The firm’s opportunity cost of using its own capital.

Front 66

Implied repo rate

Back 66

The rate of return from a cash-and-carry transaction implied by the futures price relative to the spot price.

Front 67

Implied volatility

Back 67

The volatility that option traders use to price an option, implied by the price of the option and a particular option-pricing model.

Front 68

Implied yield

Back 68

A measure of the yield on the underlying bond of a futures contract implied by pricing it as though the underlying will be delivered at the futures expiration.

Front 69

Imputation

Back 69

In reference to corporate taxes, a system that imputes, or attributes, taxes at only one level of taxation. For countries using an imputation tax system, taxes on dividends are effectively levied only at the shareholder rate. Taxes are paid at the corporate level but they are attributed to the shareholder. bShareholders deduct from their tax bill their portion of taxes paid by the company.

Front 70

Incentive system

Back 70

A method of organizing production that uses a market-like mechanism inside the firm.

Front 71

Income

Back 71

Increases in economic benefits in the form of inflows or enhancements of assets, or decreases of liabilities that result in an increase in equity (other than increases resulting from contributions by owners).

Front 72

Income elasticity of demand

Back 72

The responsiveness of demand to a change in income, other things remaining the same. It is calculated as the percentage change in the quantity demanded divided by the percentage change in income.

Front 73

Income statement (statement of operations or profit and loss statement)

Back 73

A financial statement that provides information about a company’s profitability over a stated period of time.

Front 74

Income tax paid

Back 74

The actual amount paid for income taxes in the period; not a provision, but the actual cash outflow.

Front 75

Income tax payable

Back 75

The income tax owed by the company on the basis of taxable income.

Front 76

Income tax recoverable

Back 76

The income tax expected to be recovered, from the taxing authority, on the basis of taxable income. It is a recovery of previously remitted taxes or future taxes owed by the company.

Front 77

Income trust

Back 77

A type of equity ownership vehicle established as a trust issuing ownership shares known as units.

Front 78

Incremental cash flow

Back 78

The cash flow that is realized because of a decision; the changes or increments to cash flows resulting from a decision or action.

Front 79

Independent

Back 79

With reference to events, the property that the occurrence of one event does not affect the probability of another event occurring.

Front 80

Independent and identically distributed (IID)

Back 80

With respect to random variables, the property of random variables that are independent of each other but follow the identical probability distribution.

Front 81

Independent projects

Back 81

Independent projects are projects whose cash flows are independent of each other.

Front 82

Independent variable

Back 82

A variable used to explain the dependent variable in a regression; a right-hand-side variable in a regression equation.

Front 83

Index amortizing swap

Back 83

An interest rate swap in which the notional principal is indexed to the level of interest rates and declines with the level of interest rates according to a predefined schedule. This type of swap is frequently used to hedge securities that are prepaid as interest rates decline, such as mortgagebacked securities.

Front 84

Index option

Back 84

An option in which the underlying is a stock index.

Front 85

Indexing

Back 85

An investment strategy in which an investor constructs a portfolio to mirror the performance of a specified index.

Front 86

Indifference curve

Back 86

The graph of risk–return combinations that an investor would be willing to accept to maintain a given level of utility.

Front 87

Indirect format (indirect method)

Back 87

With reference to cash flow statements, a format for the presentation of the statement which, in the operating cash flow section, begins with net income then shows additions and subtractions to arrive at operating cash flow.

Front 88

Induced taxes

Back 88

Taxes that vary with real GDP.

Front 89

Industry

Back 89

A group of companies offering similar products and/or services.

Front 90

Industry analysis

Back 90

The analysis of a specific branch of manufacturing, service, or trade.

Front 91

Inelastic demand

Back 91

A demand with a price elasticity between 0 and 1; the percentage change in the quantity demanded is less than the percentage change in price.

Front 92

Inflation premium

Back 92

An extra return that compensates investors for expected inflation.

Front 93

Inflation rate

Back 93

The annual percentage change in the price level.

Front 94

Inflation rate targeting

Back 94

A monetary policy strategy in which the central bank makes a public commitment to achieve an explicit inflation rate and to explain how its policy actions will achieve that target.

Front 95

Inflationary gap

Back 95

The amount by which real GDP exceeds potential GDP.

Front 96

Information ratio (IR)

Back 96

Mean active return divided by active risk.

Front 97

Information cascade

Back 97

The transmission of information from those participants who act first and whose decisions influence the decisions of others.

Front 98

Information-motivated traders

Back 98

Traders that trade to profit from information that they believe allows them to predict future prices.

Front 99

Informationally efficient market

Back 99

A market in which asset prices reflect new information quickly and rationally.

Front 100

Initial margin

Back 100

The amount that must be deposited in a clearinghouse account when entering into a futures contract.

Front 101

Initial margin requirement

Back 101

The margin requirement on the first day of a transaction as well as on any day in which additional margin funds must be deposited.

Front 102

Initial public offering (IPO)

Back 102

The first issuance of common shares to the public by a formerly private corporation.

Front 103

In-sample forecast errors

Back 103

The residuals from a fitted time-series model within the sample period used to fit the model.

Front 104

Instability in the minimum-variance frontier

Back 104

The characteristic of minimum-variance frontiers that they are sensitive to small changes in inputs.

Front 105

Installment

Back 105

Said of a sale in which proceeds are to be paid in installments over an extended period of time.

Front 106

Installment method (installment-sales method)

Back 106

With respect to revenue recognition, a method that specifies that the portion of the total profit of the sale that is recognized in each period is determined by the percentage of the total sales price for which the seller has received cash.

Front 107

Instrument rule

Back 107

A decision rule for monetary policy that sets the policy instrument at a level that is based on the current state of the economy.

Front 108

Intangible assets

Back 108

Assets lacking physical substance, such as patents and trademarks.

Front 109

Interest coverage

Back 109

A solvency ratio calculated as EBIT divided by interest payments.

Front 110

Interest rate

Back 110

A rate of return that reflects the relationship between differently dated cash flows; a discount rate.

Front 111

Interest rate call

Back 111

An option in which the holder has the right to make a known interest payment and receive an unknown interest payment.

Front 112

Interest rate cap or cap

Back 112

A series of call options on an interest rate, with each option expiring at the date on which the floating loan rate will be reset, and with each option having the same exercise rate. A cap in general can have an underlying other than an interest rate.

Front 113

Interest rate collar

Back 113

A combination of a long cap and a short floor, or a short cap and a long floor. A collar in general can have an underlying other than an interest rate.

Front 114

Interest rate floor or floor

Back 114

A series of put options on an interest rate, with each option expiring at the date on which the floating loan rate will be reset, and with each option having the same exercise rate. A floor in general can have an underlying other than the interest rate.

Front 115

Interest rate forward

Back 115

See Forward rate agreement.

Front 116

Interest rate option

Back 116

An option in which the underlying is an interest rate.

Front 117

Interest rate parity

Back 117

A formula that expresses the equivalence or parity of spot and forward rates, after adjusting for differences in the interest rates.

Front 118

Interest rate put

Back 118

An option in which the holder has the right to make an unknown interest payment and receive a known interest payment.

Front 119

Interest rate swap

Back 119

A swap in which the underlying is an interest rate. Can be viewed as a currency swap in which both currencies are the same and can be created as a combination of currency swaps.

Front 120

Intergenerational data mining

Back 120

A form of data mining that applies information developed by previous researchers using a dataset to guide current research using the same or a related dataset.

Front 121

Intermarket analysis

Back 121

A field within technical analysis that combines analysis of major categories of securities—namely, equities, bonds, currencies, and commodities—to identify market trends and possible inflections in a trend.

Front 122

Internal rate of return (IRR)

Back 122

The discount rate that makes net present value equal 0; the discount rate that makes the present value of an investment’s costs (outflows) equal to the present value of the investment’s benefits (inflows).

Front 123

Interquartile range

Back 123

The difference between the third and first quartiles of a dataset.

Front 124

Interval

Back 124

With reference to grouped data, a set of values within which an observation falls.

Front 125

Interval scale

Back 125

A measurement scale that not only ranks data but also gives assurance that the differences between scale values are equal.

Front 126

In-the-money

Back 126

Options that, if exercised, would result in the value received being worth more than the payment required to exercise.

Front 127

Inventory

Back 127

The unsold units of product on hand.

Front 128

Inventory blanket lien

Back 128

The use of inventory as collateral for a loan. Though the lender has claim to some or all of the company’s inventory, the company may still sell or use the inventory in the ordinary course of business.

Front 129

Inventory turnover

Back 129

An activity ratio calculated as cost of goods sold divided by average inventory.

Front 130

Inverse floater

Back 130

A floating-rate note or bond in which the coupon is adjusted to move opposite to a benchmark interest rate.

Front 131

Investing activities

Back 131

Activities which are associated with the acquisition and disposal of property, plant, and equipment; intangible assets; other long-term assets; and both long-term and short-term investments in the equity and debt (bonds and loans) issued by other companies.

Front 132

Investment banks

Back 132

Financial intermediaries that provide advice to their mostly corporate clients and help them arrange transactions such as initial and seasoned securities offerings.

Front 133

Investment opportunity schedule

Back 133

A graphical depiction of a company’s investment opportunities ordered from highest to lowest expected return. A company’s optimal capital budget is found where the investment opportunity schedule intersects with the company’s marginal cost of capital.

Front 134

Investment policy statement (IPS)

Back 134

A written planning document that describes a client’s investment objectives and risk tolerance over a relevant time horizon, along with constraints that apply to the client’s portfolio.

Front 135

Investment strategy

Back 135

A set of rules, guidelines, or procedures that is used to analyze and select securities and manage portfolios.

Front 136

IRR rule

Back 136

An investment decision rule that accepts projects or investments for which the IRR is greater than the opportunity cost of capital.

Front 137

January effect (also turn-of-the-year effect)

Back 137

Calendar anomaly that stock market returns in January are significantly higher compared to the rest of the months of the year, with most of the abnormal returns reported during the first five trading days in January.

Front 138

Joint probability

Back 138

The probability of the joint occurrence of stated events.

Front 139

Joint probability function

Back 139

A function giving the probability of joint occurrences of values of stated random variables.

Front 140

Joint venture

Back 140

An entity (partnership, corporation, or other legal form) where control is shared by two or more entities called venturers.

Front 141

Just-in-time method

Back 141

Method of managing inventory that minimizes in-process inventory stocks.

Front 142

Keynesian

Back 142

A macroeconomist who believes that left alone, the economy would rarely operate at full employment and that to achieve full employment, active help from fiscal policy and monetary policy is required.

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Keynesian cycle theory

Back 143

A theory that fluctuations in investment driven by fluctuations in business confidence—summarized in the phrase “animal spirits”—are the main source of fluctuations in aggregate demand.

Front 144

Kondratieff wave

Back 144

A 54-year long economic cycle postulated by Nikolai Kondratieff.

Front 145

k-percent rule

Back 145

A rule that makes the quantity of money grow at a rate of k percent a year, where k equals the growth rate of potential GDP.

Front 146

kth Order autocorrelation

Back 146

The correlation between observations in a time series separated by k periods.

Front 147

Kurtosis

Back 147

The statistical measure that indicates the peakedness of a distribution.