CFA Level I terms: M

A ratio ranks funds but does not say by how much they beat the market. M² turns the Sharpe ratio back into a return.

Sharpe ratio, Treynor ratio, M² and Jensen's alpha Portfolio Construction

Compare M² with the market return, not with zero. The difference is the M² alpha.

Sharpe ratio, Treynor ratio, M² and Jensen's alpha Portfolio Construction

Macaulay duration is the average time you wait for a bond's cash flows, where each payment counts in proportion to how much of the bond's value it is worth today.

Macaulay duration: definition and calculation Fixed Income

Macaulay duration between coupon dates is therefore the duration at the last coupon date minus $t/T$, measured in periods.

Macaulay duration: definition and calculation Fixed Income

Macro risk, also called systematic risk, is a broad, economy-wide risk that affects the whole market. When the economy and financial markets do well, most assets do well, and when they do badly, most assets do badly.

Macro and micro risk and the risk-return trade-off Quantitative Methods

Policy. Monetary and fiscal policy traditionally aim to smooth the business cycle. Macroprudential policy aims at the financial system, damping credit booms with tools such as limits on loan-to-value ratios.

Credit cycles Economics

Maintaining competence is part of the duty: the Standard emphasizes not just reaching competence but keeping it as responsibilities change.

Standard I(E): Competence Ethical and Professional Standards

Maintenance capex keeps existing capacity running, so it roughly equals depreciation. Growth capex adds capacity and follows the volume plans.

Forecasting working capital, capex, cash flow and the balance sheet Financial Statement Analysis

They copy what the business already does, so they are the easiest to forecast and the least risky. The spending is often called maintenance capital expenditures.

Types of capital investments Corporate Finance

The maintenance margin is the minimum balance that must be held from then until settlement. It is set below the initial margin.

Futures contracts, daily settlement and margin calls Derivatives

A make-whole call is different: the issuer pays a price based on the yield of a government bond of similar maturity plus a small spread.

Callable, putable and convertible bonds Fixed Income

Intervenes to hit unannounced internal or external goals ("dirty float")

Exchange rate regimes and their effects on trade and capital flows Economics

Managed futures funds, also called commodity trading advisers (CTAs), trade futures in commodities, equities, bonds and currencies using models that follow trends and momentum.

Hedge fund strategies: equity, event-driven, relative value, opportunistic Alternative Investments

In a management buy-in (MBI) the current team is replaced by the acquiring team.

Private equity strategies: buyouts, venture capital and growth equity Alternative Investments

If existing managers are among the buyers, it is a management buyout (MBO). The target can also be a private company, for example a family business sold to a buyout fund before a later listing.

Public vs private equity: venture capital, buyouts and PIPEs Equities

The management fee is a percentage of a base, often 1% to 2% a year. The base matters.

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

A management proposal is a standard item, usually a matter the law requires: electing the board of directors, resolutions on executive pay and on dividends, and ratifying the independent auditor.

How shareholders vote: proposals, proxies, proxy advisors and asset managers Equities

Management's discussion and analysis (also called management commentary or the operating and financial review) is generally unaudited, apart from excerpts of the financial statements.

Regulatory filings, notes, MD&A and the audit report Financial Statement Analysis

Managing to a mandate means managing a pooled fund or index strategy to a stated objective. Your duty is to invest consistently with that mandate, so the manager of an inflation-linked government bond fund who buys equities to chase returns is out of line.

Standard III(C): Suitability Ethical and Professional Standards

If the balance falls below the maintenance margin, the exchange issues a margin call: a request to deposit funds at once.

Futures contracts, daily settlement and margin calls Derivatives

Margin direction. Expenses growing faster than revenue mean margins fall. Expenses growing slower mean margins rise.

From the forecast model to an equity value Equities

In margin financing, the broker lends the fund the securities or cash, and the fund deposits cash or other collateral in a margin account, based on set fractions of its positions.

Leverage, redemptions, lockups and gates Alternative Investments

In central clearing, over-the-counter (OTC) dealers post margin or eligible collateral to a central counterparty, and they usually require the same from their clients. This margin for OTC derivatives gives forwards daily cash flows similar to futures.

Why forward and futures prices differ Derivatives

The distance from the mean to either bound is the margin of error, the half-width of the interval.

Confidence intervals for a mean return Quantitative Methods

The margin vs market share trade-off is the decision: pass on the cost and protect margin at the risk of volume, or absorb some of it to defend share.

Forecasting sales and costs with inflation or deflation Financial Statement Analysis

The marginal probability is the distribution of one variable on its own. For a grid it is the row or column total, as in the expected-return step above.

Covariance and correlation from a joint probability table Quantitative Methods

The marginal propensity to consume (MPC) is the share of each extra unit of disposable income that is spent.

Fiscal policy tools and the fiscal multiplier Economics

The marginal propensity to save (MPS) is the share saved, so MPS = 1 − MPC.

Fiscal policy tools and the fiscal multiplier Economics

The slope of the curve is the marginal rate of substitution between risk and return: the extra return the investor needs for a bit more risk.

Risk preferences, mean–variance utility and indifference curves Quantitative Methods

Average revenue is revenue per unit, which is simply the price. Marginal revenue is the extra revenue from selling one more unit.

Breakeven and shutdown points Economics

The mark to market (MTM) is the change in the contract's value since the last mark. Under daily settlement the exchange pays that gain from the loser's margin account to the winner's, and the contract is re-set to the new settlement price.

Futures price at inception and how daily settlement changes value Derivatives

The mark-to-market (MTM) value starts at zero and then moves with interest rates and with the passing of time.

Swap value after inception: time and rate changes Derivatives

A market anomaly is an apparent deviation from the efficient market hypothesis: a persistent abnormal return that differs from zero and is predictable in direction.

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

Market beta is the broad market exposure you could buy with an index fund or exchange-traded fund (ETF). Strategy beta is the systematic return that comes from the hedge fund's strategy applied across the market, such as merger spreads or trend following.

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

Market breadth is the number of orders at different price levels just above and below the best bid and ask.

Liquidity: market float, average daily volume and turnover Equities

Three numbers you can look up: book value of equity (from the financial statements), market capitalization (from the share price) and enterprise value (EV) (from the market values of all claims, net of cash).

Book value, market capitalization and enterprise value Equities

Market depth is the size of orders posted at or very near the best bid and ask. A book with roughly equal size on both sides shows supply and demand in balance.

Where shares trade: exchanges, off-exchange and over the counter Equities

Companies and countries compete for capital, and the cost of capital rises with perceived risk, including the risk that statements mislead.

Why managers misreport, and what stops them Financial Statement Analysis

Its price today is the present value of those cash flows, each discounted at the rate the market demands for bonds of that risk and maturity. That rate is the market discount rate, quoted as the yield to maturity.

Pricing bonds: zero-coupon, coupon and perpetual Quantitative Methods

Market efficiency improves because derivatives need less capital, cost less to trade and make shorting easy. When a price drifts from fundamental value, exploiting the gap is cheaper in the derivative market than in the cash market, so the correction often happens in derivatives first and then spreads to the cash market.

Why use derivatives: the four benefits Derivatives

The market float is the part of a company's shares available to the investing public. Shares held by controlling shareholders, and often by governments or in strategic cross-holdings, are left out.

Market-cap, float-adjusted and fundamental weighting Quantitative Methods

Market growth and market share split the job in two, and the two effects multiply.

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

Market impact (price impact) is the cost of trading immediately. A large buyer must push the price up to find sellers.

Where shares trade: exchanges, off-exchange and over the counter Equities

A market index adds up the values of many securities to show how a market performs. You cannot hold an index itself.

Types of returns: assets, instruments and indicators Quantitative Methods

Market liquidity risk is the risk that the price at which you can actually trade differs from the price you see.

What drives credit spreads Fixed Income

The dealers act as market makers: they quote prices and then trade offsetting contracts with each other to pass the risk on.

OTC vs exchange-traded derivatives and central clearing Derivatives

Market manipulation damages every investor by lowering confidence in the fairness of the market, which raises risk premiums and discourages participation.

Standard II(B): Market Manipulation Ethical and Professional Standards

The market model is the same idea on raw returns. The two give similar betas.

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

A market neutral fund balances longs and shorts so that its beta is close to zero. It profits from the gap between good and bad stock picks rather than from the market.

Hedge fund strategies: equity, event-driven, relative value, opportunistic Alternative Investments

A market order buys or sells a set number of shares at the best price available now. A limit order sets a price boundary: a buy limit gives the most you will pay, a sell limit the least you will accept.

Where shares trade: exchanges, off-exchange and over the counter Equities

If every investor sees the same risky assets the same way, they all hold the same tangency portfolio. That portfolio must then be the market portfolio: all risky assets at their market-value weights.

From the capital allocation line to the capital market line and the CAPM Quantitative Methods

The market portfolio. In theory the market portfolio holds every risky asset, traded or not. In practice the market portfolio proxy is a liquid public equity index chosen to fit the stock.

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

The market price, written $P_t$, is what a share can be freely bought and sold for in the secondary market right now.

Market price, intrinsic value and perceived value Equities

The slope is the extra return for each extra unit of risk, often called the market price of risk.

The capital allocation line and the optimal portfolio Portfolio Construction

The coupon rate is a market reference rate (MRR) plus a credit spread.

The features of a bond Fixed Income

The floating rate is a market reference rate (MRR) that resets every period, such as the Secured Overnight Financing Rate (SOFR) or the Sterling Overnight Index Average (SONIA).

Interest rate swaps: fixed vs floating Derivatives

Market resiliency is how quickly prices return to a stable market-clearing price (the price at which all buy and sell orders can be executed, with no excess demand or supply) after a shock.

Liquidity: market float, average daily volume and turnover Equities

Market risk is the possibility that market-wide forces move the returns of all financial assets unexpectedly.

Macro and micro risk and the risk-return trade-off Quantitative Methods

The market risk premium (MRP) is the expected return of the market over the risk-free rate. There are two forms, and you should know both.

Macro and micro risk and the risk-return trade-off Quantitative Methods

There are three inputs: the risk-free rate $r_f$, the expected market risk premium (MRP) $E[r_m] - r_f$ (what the market is expected to earn over the risk-free rate), and the stock's beta $\beta_i$.

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

Market share is the percentage of total industry sales a company generates over a period: its revenue from the industry's goods or services divided by the industry's size.

Industry size, growth, profitability and concentration Equities

Transaction-based manipulation covers trading where you knew, or should have known, that your actions could distort the price of a security.

Standard II(B): Market Manipulation Ethical and Professional Standards

A market value CLO pays tranches according to the market value of the portfolio. A synthetic CLO builds its pool with credit derivatives.

Collateralized debt obligations and CLOs Fixed Income

That is the present value at the weighted average cost of capital (WACC), and it gives the firm value. Then subtract the market value of debt.

From the forecast model to an equity value Equities

Market value weighting means each bond counts for its share of the total market value of debt in the index. Market value is par outstanding times price, divided by 100.

Bond indexes and how they differ from equity indexes Fixed Income

Use market value weights: the current market value of each source of capital as a share of the total. Investors' opportunity cost reflects what their holdings are worth today.

Weighted-average cost of capital (WACC) Corporate Finance

In market-capitalization weighting (also called value weighting) each constituent's weight is its market value divided by the total market value of all constituents.

Market-cap, float-adjusted and fundamental weighting Quantitative Methods

Market resiliency is how quickly prices return to a stable market-clearing price (the price at which all buy and sell orders can be executed, with no excess demand or supply) after a shock.

Liquidity: market float, average daily volume and turnover Equities

These are the market-value weights. They sum to one.

Portfolio duration and convexity Fixed Income

The Markowitz efficient frontier is the region's upper-left edge: for each level of risk, the highest expected return (equivalently, the lowest risk for each return).

The minimum-variance portfolio and the efficient frontier Quantitative Methods

A master limited partnership (MLP) is a partnership whose units are often publicly traded, common in real estate and natural resources.

Ownership structures: general and limited partners Alternative Investments

A master repurchase agreement or similar document governs all trades between two parties: margining, substitution of collateral and events of default.

Repurchase agreements (repos) Fixed Income

In a master-feeder structure, an onshore feeder (for taxable investors in the home country) and an offshore feeder (for foreign and tax-exempt investors) both invest in one master fund, which makes the trades.

How to invest in hedge funds: master-feeder, SMAs, funds of funds Alternative Investments

Match funding pairs the life of the funding with the life of the need. Permanent current assets stay on the balance sheet all year, so they are funded long term.

Working capital management approaches Corporate Finance

The matching principle says expenses belong in the same period as the revenue they help earn, so cost of goods sold is recognized when the goods are sold.

Expense recognition: capitalizing vs expensing Financial Statement Analysis

The rule that ties them together is matching the discount rate to the claim: the rate must fit whoever owns the cash flow in the numerator.

Dividends, FCFE, FCFF or residual income: which cash flow, which discount rate Equities

What analysts do: the practice of matching the risk-free rate to the forecast horizon uses a long-run average rather than today's short-term rate.

Where DCF and growth models break down Equities

An ESG factor is material when it is believed to have a significant effect on a company's results or business model.

ESG factors investors consider Corporate Finance

You must promptly disclose material changes that might affect the process, especially newly identified significant risks or limitations.

Standard V(B): Communication with Clients and Prospective Clients Ethical and Professional Standards

Analysts cannot receive material nonpublic information (for example a pending merger or a planned share issue that the bankers know about) unless it is made public.

Sell-side, buy-side and activist short-seller research Equities

Material. Materiality turns on the likely effect on price, or on whether a reasonable investor would want the information before deciding.

Standard II(A): Material Nonpublic Information Ethical and Professional Standards

Matrix pricing estimates the price from actively traded comparable bonds: bonds with similar credit quality, maturity and coupon rate.

Matrix pricing Fixed Income

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

A mature industry has already reached most of its potential customers, so it grows at or below the economy's rate.

Industry size, growth, profitability and concentration Equities

The maturity is the date of the final payment. The tenor is the time remaining until it.

The features of a bond Fixed Income

The most useful table is the maturity analysis of lease liabilities: undiscounted payments due in each of the next years and a total for the later years, with the imputed interest taken off to reach the liability.

Leases: finance vs operating and lessee accounting (IFRS vs US GAAP) Financial Statement Analysis

Longer-maturity government bonds earned more than shorter ones. This is the maturity effect: compensation for tying up capital longer, for inflation and for greater sensitivity to interest rates.

Long-run asset class returns and their components Quantitative Methods

Bonds: the default risk premium (the borrower may not pay in full and on time), the liquidity premium (selling quickly costs you a discount) and the maturity risk premium (long bonds lose more value when rates rise).

Required return: risk-free rate, inflation and risk premia Quantitative Methods

One more is time to maturity: the maturity structure of interest rates, also called the term structure of interest rates, describes how yields change as the time to maturity changes.

Spot rates and pricing a bond with the spot curve Fixed Income

The mean absolute deviation (MAD) is the average distance of the observations from the mean, ignoring direction.

Range, mean absolute deviation, variance and standard deviation Quantitative Methods

Betas tend to drift toward 1.0 over time (mean reversion of beta): high betas fall and low betas rise. A cost of equity discounts future cash flows, so a beta pulled toward 1.0 can be the better forecast.

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

Each mean square is a sum of squares divided by its degrees of freedom. With k independent variables the regression row has k degrees of freedom and the error row n − k − 1.

The ANOVA table and the standard error of the estimate Quantitative Methods

The mean square error (MSE) is the average squared miss.

The ANOVA table and the standard error of the estimate Quantitative Methods

The mean square regression (MSR) is the explained variation per degree of freedom.

The ANOVA table and the standard error of the estimate Quantitative Methods

A skewed distribution of multiples has a few very high values that pull the mean well above the median (positive skew). That is the heart of mean versus median: with positive skew the median is the better measure of the center.

Valuing with multiples: comparables and forecasted fundamentals Equities

Mean–variance analysis evaluates investments using only expected return (reward) and variance of return (risk).

Portfolio expected return, variance and the role of correlation Quantitative Methods

This is one example of mean–variance utility: any utility that depends only on expected return and risk, U = U(E[r_P], σ_P). The formula above is the standard special case.

Risk preferences, mean–variance utility and indifference curves Quantitative Methods

A measure of central tendency tells you where a data set is centered. For a return series it is, in effect, a summary of the return you might "expect" based on history.

Mean, median, mode and what outliers do to them Quantitative Methods

the measurement basis (cost or revaluation), the depreciation method and the useful life or depreciation rate;.

PP&E disclosures, fixed asset turnover and asset age Financial Statement Analysis

Quantiles are measures of location: they say where a value sits in the sorted data, not where the data are centered.

Quartiles, percentiles and box plots Quantitative Methods

The median is the middle value once the data are sorted. With an odd count it is the single middle observation.

Mean, median, mode and what outliers do to them Quantitative Methods

The median absolute deviation takes the median of the distances from the median. Like the median, it is robust: one wild return barely moves it.

Range, mean absolute deviation, variance and standard deviation Quantitative Methods

Traditional assets are priced and traded in widely accepted fiat currency and convert into it readily. A medium of exchange is what people accept in payment.

How digital assets differ from stocks, bonds and currencies Alternative Investments

Meet or beat expectations. Meeting earnings expectations means matching analyst forecasts or management's own guidance.

Why managers misreport, and what stops them Financial Statement Analysis

Meme coins are cryptocurrencies often started as a joke, launched for entertainment and carried by online popularity rather than utility.

How digital assets differ from stocks, bonds and currencies Alternative Investments

Naive or story-based valuation rests on a narrative about a company that is not tied to any in-depth economic or financial analysis. It drives meme stocks, shares whose buyers are swayed mainly by social media posts, and cult companies, which are bought out of loyalty to a product rather than expected performance.

Market price, intrinsic value and perceived value Equities

Mental accounting bias is dividing money into mental accounts that influence decisions, even though money is fungible.

Cognitive errors: belief perseverance and information processing Portfolio Construction

Merger arbitrage buys the target's shares at a discount to the announced price and, in a stock deal, shorts the acquirer.

Hedge fund strategies: equity, event-driven, relative value, opportunistic Alternative Investments

A platykurtic one is thin-tailed (short-tailed). A mesokurtic distribution has tails like the normal's.

Skewness and kurtosis Quantitative Methods

A justified price multiple is the estimated fair value of a multiple. It is supported by the method of comparables or the method of forecasted fundamentals (Learning Module 7 covers both).

Equity valuation models: present value, asset-based and relative Equities

A justified price multiple is the estimated fair value of a multiple. It is supported by the method of comparables or the method of forecasted fundamentals (Learning Module 7 covers both).

Equity valuation models: present value, asset-based and relative Equities

Mezzanine debt is private credit that is subordinated to senior secured debt but senior to equity. It gives borrowers an extra pool of capital beyond senior debt and often finances buyouts, recapitalizations and acquisitions.

Private debt: direct lending, mezzanine, venture and distressed debt Alternative Investments

Mezzanine-stage financing is bridge money that carries a private firm to an IPO or a sale. The name describes when the money arrives (between private and public status), not how it is structured.

Private equity strategies: buyouts, venture capital and growth equity Alternative Investments

Micro risk, also called unsystematic risk, is specific to the issuer and depends on one firm's own economics: its earning power, market position, sales growth, margins, and return on assets and equity.

Macro and micro risk and the risk-return trade-off Quantitative Methods

The simplest way to get a mid-cycle margin is to average the margin over a full cycle.

The forecast horizon, normalized earnings and long-term forecasts Financial Statement Analysis

The mid-market price is halfway between them, and it is the usual stand-in for "the current price" and the benchmark for execution costs.

Where shares trade: exchanges, off-exchange and over the counter Equities

A mind map varies the idea: instead of frequency, it shows how concepts are related.

Data science: processing, visualization and text analytics Quantitative Methods

The miners on the network use powerful computers and a great deal of energy to solve a cryptographic puzzle, and the winner locks the block into the chain and earns new cryptocurrency.

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

For example a large company claiming one reportable segment, or commentary that never changes.

Warning signs of earnings manipulation Financial Statement Analysis

The minimum efficient scale is the smallest output at the lowest LRAC: 4,000 units.

Economies and diseconomies of scale Economics

The minimum-variance frontier is the whole left edge, including its lower part. That lower part is inefficient, because a portfolio on the upper part has the same risk and a higher return.

The minimum-variance portfolio and the efficient frontier Quantitative Methods

The minimum-variance portfolio, also called the global minimum-variance portfolio, is the leftmost point of the frontier.

The minimum-variance portfolio and the efficient frontier Quantitative Methods

Among unbiased estimators, the minimum-variance unbiased estimator (MVUE) has the smallest standard deviation of all, so its estimates scatter least around the truth.

The central limit theorem and the standard error of the mean Quantitative Methods

Shareholders' equity includes closely held shares but excludes minority interest (also called non-controlling interest), a stake with little say over the company.

Book value, market capitalization and enterprise value Equities

Misconduct under I(D) has two limbs. You must not engage in professional conduct involving dishonesty, fraud and deceit, and you must not commit any act that reflects adversely on your professional reputation, integrity or competence.

Standard I(D): Misconduct Ethical and Professional Standards

Misrepresentation is any knowing false or misleading statement about your analysis, recommendations, actions, qualifications or services.

Standard I(C): Misrepresentation Ethical and Professional Standards

A misrepresentation of credentials includes overstating experience, designations, track records and the firm's capabilities.

Professionalism cases: law, independence, misrepresentation, misconduct, competence Ethical and Professional Standards

A share can look cheap against its peers and still be expensive against its intrinsic value, if the whole industry or market is overvalued. That is a misvalued peer group.

Trailing, current and forward multiples Equities

Returns are rarely repeated to the last decimal, so for grouped data analysts use the modal interval: the bin with the highest frequency, which is always the tallest bar of the histogram.

Mean, median, mode and what outliers do to them Quantitative Methods

The mode is the value that appears most often. A data set with one mode is unimodal; one with several is multi-modal (modes can also be local peaks, such as a cluster of small gains and a separate cluster of losses); and some data sets have no mode at all.

Mean, median, mode and what outliers do to them Quantitative Methods

Disadvantages: model misspecification, because a relationship found for some stocks in some period may not hold elsewhere, and many factors underperform for long periods or move in cycles.

Choosing a peer group for multiples Equities

Model risk is the danger from models that are poorly built, insufficiently tested or not verified. It concerns both kinds of firm, and the answer is rigorous development, testing and verification.

Large language models and generative AI in finance Quantitative Methods

To moderate a bias is to recognize it and try to reduce or remove it in the person. To adapt to a bias is to recognize it, accept it and adjust the plan, instead of trying to change the person.

Cognitive errors vs emotional biases Portfolio Construction

Modern portfolio theory (MPT) grew from Harry Markowitz's 1952 work on portfolio selection. Its main message: investors should hold portfolios, and should focus on how the securities in them are related to one another.

Why invest through a portfolio Portfolio Construction

Modified duration turns Macaulay duration from a length of time into a price sensitivity. It is the approximate percentage change in a bond's full price for a 1 percentage point (100 bp) change in the bond's own yield-to-maturity.

Modified duration Fixed Income

Investors use derivatives to modify exposure: to add, cut or reshape their exposure to markets, rates, currencies, credit and volatility without trading the cash assets.

How investors use derivatives, compared with issuers Derivatives

Modigliani–Miller Proposition I without taxes says that the value of a levered company equals the value of an unlevered one.

Modigliani–Miller propositions Corporate Finance

Modigliani–Miller Proposition II without taxes says the cost of equity rises linearly with the debt-to-equity ratio.

Modigliani–Miller propositions Corporate Finance

Four numbers describe most of a distribution's shape. They are called its moments of a distribution.

Skewness and kurtosis Quantitative Methods

The momentum effect is the tendency for recent winners to keep winning, and recent losers to keep losing. The positive correlation typically lasts up to about two years, followed by a reversal toward the mean over a longer period.

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

The momentum factor, up minus down (UMD), is long the stocks with the highest recent returns and short those with the lowest.

Arbitrage pricing theory and multi-factor models Equities

Monetarists think fiscal changes move demand only temporarily and that monetary policy is the better tool for restraining or boosting inflationary pressure.

Fiscal vs monetary policy and what fiscal policy is for Economics

Monetary accommodation works because rising demand and inflation lower real rates, which encourages extra private spending.

How monetary and fiscal policy interact Economics

Fiscal flexibility asks how well the government keeps discipline over time and can adjust revenue and spending, judged mainly by what it has done in past downturns. Monetary effectiveness looks at the central bank.

Sovereign credit analysis: qualitative factors Fixed Income

Monetary policy is the central bank's activity aimed at influencing the quantity of money and credit in the economy.

Fiscal vs monetary policy and what fiscal policy is for Economics

The monetary transmission mechanism, covered below, then carries the effect to the wider economy.

Monetary policy tools and the transmission mechanism Economics

A monetary union adds a common currency, with one monetary policy for all members.

Trading blocs: free trade areas, customs unions, common markets and economic unions Economics

If the central bank buys government debt on a large scale, it is in effect funding the deficit. This is called monetization of debt, and it makes the independence of monetary policy doubtful.

How monetary and fiscal policy interact Economics

You know money duration from the duration module: annualized modified duration times the full price. Money convexity is built the same way.

Estimating price change with duration and convexity Fixed Income

Money duration fixes that by multiplying annualized modified duration by the bond's full price. Per 100 of par it uses the full price per 100.

Money duration and PVBP Fixed Income

A money market fund holds short-term money market instruments such as treasury bills, certificates of deposit and commercial paper.

Mutual funds, ETFs and other pooled investment products Portfolio Construction

Money market instruments are debt securities with original maturities of one year or less. They include Treasury bills (government securities issued for a year or less), commercial paper, certificates of deposit (CDs), bankers' acceptances, repurchase agreements and time deposits tied to market reference rates.

Money market rates: discount basis and add-on basis Fixed Income

Money market mutual funds hold these instruments and are sometimes used as an alternative to bank deposits.

Money market rates: discount basis and add-on basis Fixed Income

Money market securities have a tenor of one year or less at issue (Treasury bills, commercial paper). Capital market securities are longer.

The features of a bond Fixed Income

The money-weighted rate of return (also called the dollar-weighted rate of return) is an internal rate of return applied to a portfolio.

Money-weighted vs time-weighted rate of return Quantitative Methods

Moneyness compares the underlying price with the exercise price. It tells you whether exercising would pay.

Exercise value, moneyness and time value Derivatives

Under monopolistic competition there are many firms, each selling a slightly different product, so each has a little pricing power.

The four market structures compared Economics

At the other end is monopoly, a single seller with no close substitute.

The four market structures compared Economics

Spearman's $r_s$ measures a monotonic relationship: one variable consistently rising (or consistently falling) as the other rises, along a straight line or a curve, with no reversals.

Spearman rank correlation: the non-parametric test Quantitative Methods

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

Value at risk from the normal distribution Quantitative Methods

Dying relatively young, which ends an income stream and leaves dependants short.

Financial and non-financial risks, and how they interact Portfolio Construction

A fully repaid amortizing loan, such as a mortgage or a car loan, is the lender's side of the same picture: the loan amount is the present value, and the payment is the unknown.

Annuities and level-payment loans Quantitative Methods

A mortgage loan is a loan secured by a specified property. The lender holds a first lien: a legal claim on the property that ranks ahead of other claims.

Residential mortgage loans: the features that matter Fixed Income

A mortgage pass-through security is created when lenders pool mortgages and sell securities backed by the pool.

Mortgage pass-throughs and CMOs Fixed Income

A mortgage REIT underwrites mortgages or buys mortgage-backed securities.

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

By collateral, mortgage-backed securities are backed by a pool of mortgages. The distinction between mortgage-backed and other asset-backed securities is common in the United States.

Why securitize? Benefits for issuers, investors and markets Fixed Income

Under the mosaic theory, you may build a conclusion from public information plus nonmaterial nonpublic information, even if the same conclusion, heard straight from an insider, would be material nonpublic information.

Standard II(A): Material Nonpublic Information Ethical and Professional Standards

"What is the most appropriate action?" or "To comply, X should…". Here the answer is a behavior, and the best one is the most complete.

How to answer Ethics vignettes: a five-step method Ethical and Professional Standards

A most favored nation clause in a side letter gives that LP any better or additional terms the GP later gives others.

Ownership structures: general and limited partners Alternative Investments

"Which Standard is most likely violated?" Several may be touched; choose the one the facts fit best.

How to answer Ethics vignettes: a five-step method Ethical and Professional Standards

Motivation, also called pressure: a reason to do it, personal (a bonus) or corporate (concern about future financing).

Why managers misreport, and what stops them Financial Statement Analysis

Four motivations for low-quality reporting come up again and again.

Why managers misreport, and what stops them Financial Statement Analysis

The four-factor model is a widely used multi-factor model with the market plus three factors built from stock market and accounting data: firm size, value and price momentum.

Arbitrage pricing theory and multi-factor models Equities

Multi-industry companies need a blended benchmark. The segment-weighted peer multiple weights each segment's peer multiple by the segment's share of revenue, operating income or assets.

Choosing a peer group for multiples Equities

A multi-market index combines national markets: several countries, a region, a level of economic development (developed or emerging markets) or the whole world.

Types of equity indexes Equities

A data set with one mode is unimodal; one with several is multi-modal (modes can also be local peaks, such as a cluster of small gains and a separate cluster of losses); and some data sets have no mode at all.

Mean, median, mode and what outliers do to them Quantitative Methods

In a two-sided network, there are two types of user, such as buyers and sellers in an online marketplace. A multi-sided platform has two or more.

Network effects and platform business models Corporate Finance

Multi-strategy funds trade relative value within and across asset classes, often through separate pods of managers, and move capital among them as conditions change.

Hedge fund strategies: equity, event-driven, relative value, opportunistic Alternative Investments

Multilateralism is cooperative and global.

Geopolitical risk and the four country archetypes Economics

A multiple divides a value to claimants (the numerator) by a fundamental that belongs to the same claimants (the denominator).

Valuing with multiples: comparables and forecasted fundamentals Equities

If a project has an outlay, then inflows, then a large closing cost (decommissioning a mine, for example), the signs change twice and there can be multiple IRRs: more than one discount rate at which NPV is zero.

NPV and IRR in capital allocation Corporate Finance

The multiple of invested capital (MOIC) is a quick shortcut that ignores dates.

IRR and multiple of invested capital (MOIC) Alternative Investments

A multiple-price auction (discriminatory) charges each winner the price it bid. The same bond sells at different prices, and large bids can end up concentrated among a few bidders, because investors must accept their own price.

Government bond auctions and trading vs corporate bonds Fixed Income

Relative valuation, also called comparables models, uses ratios, or multiples, of a market value to a standardized income statement or balance sheet item.

Equity valuation models: present value, asset-based and relative Equities

Or apply it indirectly, using multiples in a terminal value to set the value at the end of a discounted cash flow forecast.

Valuing with multiples: comparables and forecasted fundamentals Equities

A multistage growth model fits when expected cash flow growth changes over time, for example a company expanding fast into new markets before slowing to a stable rate.

Two-stage (multistage) growth models Equities

A multistage time horizon has several phases with different needs: for example 20 working years of saving, then 25 years of retirement spending.

IPS constraints: liquidity, time horizon, taxes, legal and unique circumstances Portfolio Construction

Multivariate Monte Carlo simulation draws all the assets in each scenario jointly, with the correlation you specify.

Simulating two correlated assets: the Cholesky step Quantitative Methods

Bonds of regional and local governments are called municipal bonds in the US and usually local authority bonds elsewhere.

Agencies, supranationals and local government bonds Fixed Income

A mutual fund is a pooled investment in which each investor has a pro-rata claim on the income and value of the fund.

Mutual funds, ETFs and other pooled investment products Portfolio Construction

The mutual fund theorem says every investor can reach an efficient portfolio with just two funds: the market portfolio and the risk-free asset, lending or borrowing to set the risk.

From the capital allocation line to the capital market line and the CAPM Quantitative Methods

Mutually exclusive projects are alternatives where choosing one rules out the others. The IRR is a rate, so it hides project size and timing.

NPV and IRR in capital allocation Corporate Finance