CFA Level I terms: H

The same idea seen from the collateral side is the haircut: the share of the collateral's value that is not lent.

Repurchase agreements (repos) Fixed Income

The halo effect extends a favorable view of some characteristics to others. A company with a good growth record and strong past share price is assumed to be a good investment, with higher expected returns than its risk justifies.

How biases show up in markets: momentum, bubbles and value Portfolio Construction

Some are "hard" (mined or extracted, like copper and oil) and some "soft" (grown, like grains and coffee), which are the hard and soft commodities labels.

Commodities: sectors, ways to invest, contango and backwardation Alternative Investments

Soft commodities are agricultural products such as corn and cattle. Hard commodities are natural resources such as crude oil and metals.

What derivatives are written on: the main underlyings Derivatives

With a hard hurdle rate, the GP earns the fee only on the return above the hurdle. With a soft hurdle rate, once the fund clears the hurdle the fee applies to the whole return.

Fees and waterfalls: hurdle, catch-up, high-water mark, clawback Alternative Investments

Some stocks are hard to value: well-informed analysts disagree widely about intrinsic value. Take Sorvik Batteries, a fictional maker trading at 60 euros (EUR).

Why two analysts using the same model get different values Equities

A hard-bullet covered bond defaults as soon as a payment is not made on schedule, and payments accelerate. A soft-bullet covered bond delays default and acceleration until a new final maturity, usually up to a year after the original one.

Covered bonds Fixed Income

Harder-to-value shares are those with rapid growth, cyclical profits or big changes under way, such as a young biotech or a memory-chip maker.

Market price, intrinsic value and perceived value Equities

The harvesting period is the rest of the fund's life, when the fund exits investments and returns capital.

Private capital in a portfolio: risk, return, vintage years and diversification Alternative Investments

A blockchain is a distributed ledger in which entries are recorded in sequence inside blocks, and the blocks are linked ("chained") together and secured with cryptography. Each block holds a group of transactions plus a hash, a secure fingerprint-like link to the block before it.

Distributed ledgers and blockchain: how digital assets are recorded Alternative Investments

A reduced-form credit model treats default as an outside random event arriving at rate λ, the default intensity (also called the hazard rate).

Discrete distributions: uniform, binomial and Poisson Quantitative Methods

Unstructured or very large data need richer tools: heat maps (color shows value, such as a correlation matrix), tree diagrams, network graphs and interactive three-dimensional (3D) graphics that users can zoom and rotate.

Data science: processing, visualization and text analytics Quantitative Methods

The Heckscher-Ohlin model points to differences in factor endowments, such as labor and capital: a country rich in capital exports capital-intensive goods.

Benefits and costs of international trade Economics

Hedge accounting fixes the timing. It allows the issuer to offset the hedging instrument (usually a derivative) against the hedged transaction or balance sheet item, so both reach earnings together.

How companies use derivatives: hedge accounting Derivatives

A hedge fund is a private pooled investment vehicle defined by how it invests, not by what it holds. It may own equities, bonds, currencies, commodities or derivatives, and it often combines them with borrowing and short positions.

What a hedge fund is, and how it differs from other funds Alternative Investments

Hedge fund indexes are built from data that managers report voluntarily, so they probably overstate performance.

Hedge fund returns: market beta, strategy beta, alpha and diversification Alternative Investments

Hedge funds are private vehicles that may hold public shares and bonds, private capital or real assets. What defines them is the approach: frequent use of leverage, derivatives and short selling, which can give a very different risk and return from simply holding the assets.

What makes an investment alternative: features and categories Alternative Investments

The hedge ratio is the number of shares to hold for each option sold so that the portfolio ends at the same value in both states.

The one-period binomial tree and the hedge ratio Derivatives

Multi-currency indexes report hedged and unhedged returns. Unhedged returns include currency gains and losses.

Bond indexes and how they differ from equity indexes Fixed Income

Buy the asset and sell it forward. This hedged portfolio has a certain outcome: you receive F₀(T) at T whatever S_T is.

Replication and the no-arbitrage forward price Derivatives

Hedging is using a derivative to offset or neutralize an existing or expected exposure. The derivative is then called the hedge.

What a derivative is Derivatives

A party that loses when rates rise buys the FRA; a party that loses when rates fall sells it. This is hedging rate-sensitive liabilities (and assets) with a forward rate.

Forward rate agreements (FRAs): settlement and uses Derivatives

Hegemony is non-cooperative and global.

Geopolitical risk and the four country archetypes Economics

An asset is held for sale when management intends to sell it, the sale is highly probable and the asset is available for immediate sale in its present condition.

Impairment and derecognition of PP&E and intangibles Financial Statement Analysis

Held-to-maturity is a debt security the company intends and is able to hold to maturity. It is measured at amortized cost, like IFRS debt held to collect contractual cash flows that are only principal and interest.

Financial instruments: amortized cost, FVOCI and FVPL Financial Statement Analysis

Herding. Herding is following the crowd, as safer for reputation. It comes from regret aversion and strengthens trends.

How biases show up in markets: momentum, bubbles and value Portfolio Construction

The Herfindahl-Hirschman index (HHI) squares the shares first, with shares written as decimals, so that a monopoly scores 1.

Concentration ratio and Herfindahl-Hirschman index Economics

The usual measure is the Herfindahl-Hirschman Index (HHI), introduced in Economics: the sum of the squared market shares of the firms in the industry.

Industry size, growth, profitability and concentration Equities

Every property is different. Heterogeneity means no two properties are identical: location, age, tenant credit quality, lease length and local demographics all differ.

Real estate: features and ways to invest (direct, REITs, funds) Alternative Investments

The spread of the residuals changes with X, which is heteroskedasticity. A fan opening to the right means larger X goes with larger errors.

The four regression assumptions and what residual plots reveal Quantitative Methods

The hidden revenue business model gives services to users at no charge and earns revenue elsewhere. Media with free content and paid advertising is the classic case.

Pricing and revenue models Corporate Finance

The three schemes are each a hierarchical taxonomy, like the species, genus and family ranking in biology. A company is placed in one group at the lowest tier, and that placement fixes its groups at every higher tier.

Industry classification: GICS, ICB, TRBC and other groupings Equities

The hierarchy of interests ranks goals from those essential for survival, at the top, to nice-but-not-essential ones lower down.

Geopolitics: cooperation vs competition Economics

High yield (also speculative grade, or junk) means BB+ or Ba1 and below. D means the issuer is in default.

Bond market segments, issuers and investors Fixed Income

A high-beta stock has a beta above 1 and swings more than the market. A low-beta stock has a beta below 1 and swings less.

Estimating the cost of equity with the CAPM and the market model Equities

High-frequency data are recorded at extremely short intervals, often milliseconds or microseconds, such as trades and quotes.

Big data, the four Vs and alternative data Quantitative Methods

A high-water mark is the fund's highest value on which a fee was charged, net of fees. If the value then falls, no performance fee is due until the value climbs back above that mark.

Fees and waterfalls: hurdle, catch-up, high-water mark, clawback Alternative Investments

Hindsight bias is believing that past events were predictable and reasonable to expect. People also remember their own predictions as more accurate than they were.

Cognitive errors: belief perseverance and information processing Portfolio Construction

The historical average EPS method takes the average EPS over the most recent full cycle. The average return on equity method takes the average ROE over the cycle times the current book value per share (BVPS).

Price multiples: P/E, earnings yield, P/S, P/B and dividend yield Equities

There are three approaches: a historical expense model (past growth, or a regression on revenue), itemization of the economically significant expenses, and a direct profit margin assumption.

Expense models: margins, itemization and operating leverage Equities

Dividends are reported directly; FCFE and FCFF must be built from several lines and are often volatile. A historical growth rate is the compound rate between two past years.

Constant growth models, implied growth and the sustainable growth rate Equities

The historical market risk premium is the average past total return on a broad stock index minus the average past return on a government security from the same country, over a period long enough for the average to be a fair guide to the future.

Industry betas, the market risk premium and country risk Equities

Historical return is what an asset actually earned in the past. Expected return is what an investor anticipates earning in the future.

How the major asset classes compare on return and risk Portfolio Construction

A historical revenue model extends the company's past revenue growth. It works for a mature company: established products, a stable product mix and geographic footprint, and no expected change in competition.

Revenue models: historical, bottom-up and top-down Equities

Historical simulation and Monte Carlo simulation VaR are built in Learning Module 9.

Value at risk from the normal distribution Quantitative Methods

Historical value at risk (VaR) for a confidence level $c$ and $n$ scenarios sits at rank $(1 - c) \times n$ from the worst.

Historical simulation and historical value at risk Quantitative Methods

A private equity fund buys a business, improves it and sells it at a higher value. It holds a company for about five years on average, though the holding period can run from under six months to more than ten.

How private equity exits: trade sale, IPO, SPAC and more Alternative Investments

Together the two pieces make the total return, and the holding period return is simply that total return measured over whatever period you held.

Holding period return Quantitative Methods

Investors tend to hold too much of their own market, a pattern called home asset bias. Owning foreign shares offsets it.

Investing across jurisdictions: dual listings and depositary receipts Equities

Home bias is a preference for domestic securities in a global portfolio, or for companies headquartered nearby.

How biases show up in markets: momentum, bubbles and value Portfolio Construction

The two compound. The result is the home-currency return.

Types of returns: assets, instruments and indicators Quantitative Methods

The argument rests on homemade leverage: an investor who wants more (or less) leverage than the company has can borrow (or lend) personally, at the risk-free rate, and reach the same position.

Modigliani–Miller propositions Corporate Finance

Suppose every investor uses the same inputs: the same expected returns, standard deviations and correlations. This is homogeneity of expectations.

The capital market line Portfolio Construction

The residual variance is the same for every observation.

The four regression assumptions and what residual plots reveal Quantitative Methods

Horizon and frequency. The horizon and return frequency set how many observations you have. About 100 weekly returns over two years is a common default.

Estimating the cost of equity with the CAPM and the market model Equities

The horizon yield is the annualized return over your holding period. It treats everything you end up with, the reinvested coupons plus the sale price (or the redemption amount), as one future value, and compares it with the price you paid.

The sources of return from a fixed-rate bond Fixed Income

Horizontal common-size analysis divides each line by the same line in a base year, giving an index where the base year is 1.00.

Analysis tools: common-size, trend, cross-sectional and the limits of ratios Financial Statement Analysis

A hostile takeover is an attempt to buy the company without management's consent.

Corporate governance mechanisms Corporate Finance

A hot issue is one trading at a premium once secondary trading begins, because of strong demand. Make a bona fide public distribution.

Standard III(B): Fair Dealing Ethical and Professional Standards

Housing activity. Very sensitive to interest rates and credit availability. Building permits and starts turn early, so housing tends to lead the cycle.

Employment, capital spending, inventories, housing and trade over the cycle Economics

supply the skills and labor, the company's human capital. They want competitive pay and benefits, development, job security and a safe workplace.

Corporate stakeholders and their interests Corporate Finance

Reports written entirely by an LLM, or decisions taken on its output without human oversight, can lead to errors in investment strategy, regulatory compliance and analysis, mislead readers and erode trust.

Large language models and generative AI in finance Quantitative Methods

The decision rule compares the IRR with the hurdle rate, which is the required rate of return used in the NPV calculation.

NPV and IRR in capital allocation Corporate Finance

A hybrid blends equity and debt. Preferred stock and convertible bonds are the standard examples: bond-like income with some of the upside of equity.

Types of returns: assets, instruments and indicators Quantitative Methods

The fix is a hybrid approach. Combine LLM output with traditional data-driven models (for example, pull figures from the structured data, not from generated text) or have people review it as they would review an analyst's work.

Large language models and generative AI in finance Quantitative Methods

A hybrid fund (balanced fund) holds both stocks and bonds. Target-date (lifecycle) funds are hybrids that gradually shift from shares to bonds as the retirement date approaches.

Mutual funds, ETFs and other pooled investment products Portfolio Construction

A mortgage REIT underwrites mortgages or buys mortgage-backed securities. A hybrid REIT does both.

Real estate: features and ways to invest (direct, REITs, funds) Alternative Investments

A hypothesis is a statement about a population that we can check against data, such as "this strategy earns a positive excess return".

How a hypothesis test works: four steps from claim to decision Quantitative Methods

Hypothesis testing is the procedure that uses a sample to decide whether such a statement is plausible or whether the sample is too far from it to be chance.

How a hypothesis test works: four steps from claim to decision Quantitative Methods