CFA Level I terms: O

The counts you actually see are the observed frequency; the counts independence predicts are the expected frequency.

Chi-square test of independence with a contingency table Quantitative Methods

The serviceable market narrowed further by the company's current scale and strategy, such as its capacity, its fleet, its outlets or its sales network.

Company life cycle and the addressable market Equities

The occupancy rate measures demand against capacity, and the average daily rate measures price per room that was actually sold.

Industry-specific ratios and using ratios to forecast Financial Statement Analysis

Off-exchange trading usually covers one of three cases: shares that trade rarely (illiquid shares), very small trades by retail investors, often in low-priced shares, and very large orders, called block trades.

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

It is the most actively traded, and its coupon sits close to the market rate, so it prices near par. Seasoned bonds are off-the-run.

G-spread, I-spread, Z-spread and option-adjusted spread Fixed Income

It is the most liquid and sets benchmark yields, and some of its trading is electronic. Older issues are off-the-run securities, which trade infrequently.

Government bond auctions and trading vs corporate bonds Fixed Income

The dealer buys at the bid, the lower price, and sells at the offer, the higher price. The gap is the dealer's spread.

Exchange rate quotes and percentage change in a currency Economics

When shares are issued, prospective investors receive an equity prospectus, or an offering memorandum in the case of a private placement.

Common shares and preference shares Equities

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

An oligopoly has only a few firms, so each one's price depends on how its rivals respond.

The four market structures compared Economics

Do not omit a fact that makes the message misleading (an omission).

Standard I(C): Misrepresentation Ethical and Professional Standards

An omnichannel strategy uses digital and physical channels together to complete one sale, for example ordering online and collecting in a store, or choosing in a store and having it delivered.

Business model features Corporate Finance

The most liquid are on-the-run developed-market government bonds, the most recently issued. Primary dealers make markets in large size, with spreads of a fraction of a basis point.

Primary and secondary bond markets vs equity markets Fixed Income

The most recently issued bond of each maturity belongs to the on-the-run securities. It is the most liquid and sets benchmark yields, and some of its trading is electronic.

Government bond auctions and trading vs corporate bonds Fixed Income

The default is one share one vote: both bundles are spread in proportion to the shares held. One share has one vote and one equal slice of the dividends.

Share classes and voting rights: dual class structures and differential voting shares Equities

Value at risk (VaR) is the lower bound of a one-sided confidence interval for the change in value: a loss that will be exceeded only with a small probability over a stated horizon.

Value at risk from the normal distribution Quantitative Methods

In a one-sided network only one type of user matters to the other users. Telephone services and peer-to-peer payment apps are examples: connections between users are what counts, and there is only one kind of user.

Network effects and platform business models Corporate Finance

A one-tailed test asks about one direction only and puts all of the rejection region in that tail: the right-tail test when the claim is "greater than", the left-tail test when it is "less than".

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

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

At expiration the number of contracts still outstanding is the open interest. These are settled by cash or by physical delivery.

Futures contracts, daily settlement and margin calls Derivatives

Open market operations are purchases and sales of government bonds, usually with commercial banks or designated market makers.

Monetary policy tools and the transmission mechanism Economics

An open-end fund has an infinite life and lets investors contribute and redeem capital over time, like a mutual fund.

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

Operating activities cover cash from customers and payments to suppliers, employees and the tax authority. Under US generally accepted accounting principles (GAAP) they also include interest paid, interest received and dividends received.

How the cash flow statement links to the balance sheet and income statement Financial Statement Analysis

Lines that pass both are operating and cash-based line items, and they grow with the forecast. Receivables, inventory, payables, net long-term operating assets and intangibles bought for cash pass.

Asset and financing models Equities

For a mature company the operating cash flow vs net income comparison should therefore show CFO at or above net income.

Reading a cash flow statement: sources, uses and common-size Financial Statement Analysis

A company buys or makes inventory, sells it (often on credit) and later collects the cash. The time from buying to collecting is the operating cycle.

The cash conversion cycle Corporate Finance

Meet any one of five tests and it is a finance lease; meet none and it is an operating lease. These five classification criteria are identical under IFRS and US GAAP and are applied the same way by lessees and lessors.

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

The lessor keeps the asset on its balance sheet at cost less accumulated depreciation and goes on depreciating it. It reports operating lease revenue on a straight-line basis.

Lessor accounting: finance vs operating leases Financial Statement Analysis

Operating leverage measures how much of a company's cost base is fixed. A high share of fixed costs means that when sales fall, costs do not, so profit falls much faster than sales.

Factors affecting capital structure and the cost of capital Corporate Finance

The core business, before financing costs, taxes and non-recurring items.

Operating profitability and working capital Equities

Operating profit margin is operating income as a share of total revenue.

Industry size, growth, profitability and concentration Equities

Operating ROA and return on invested capital (ROIC) both exclude interest from the numerator. ROIC taxes the EBIT, so it shows the after-tax return on all capital employed.

Profitability ratios: margins and returns on capital Financial Statement Analysis

An operating segment earns revenue and incurs expenses, is regularly reviewed by senior management, and has its own financial information.

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

Operational advantages are the practical savings of using a derivative instead of the underlying.

Why use derivatives: the four benefits Derivatives

A growth company's revenue potential depends on how far it can expand within its serviceable market, given its operational constraints in the near term: capacity, financing, people, rules.

Company life cycle and the addressable market Equities

For large depositors, operational deposits generated by clearing, custody and cash management are also relatively stable.

How banks fund themselves short term Fixed Income

The central bank chooses the interest rate (the instrument) to reach a target that the government has set. Several inflation-targeting central banks are of this type.

Inflation targeting vs exchange rate targeting Economics

Operational risk is the risk of loss from weak controls, poor decisions and inefficient monitoring. When managers know far more than the board or shareholders, audit is poor or oversight is lacking, one group can gain at the expense of others, and managers can decide only for their own benefit.

Corporate governance risks and benefits Corporate Finance

Opportunistic real estate strategies include major redevelopment, repurposing, taking on large vacancies, distressed property and new development.

Real estate returns: core to opportunistic, leverage and diversification Alternative Investments

Conditions that make it possible. Inside the company, poor internal controls or an ineffective board.

Why managers misreport, and what stops them Financial Statement Analysis

A country has a comparative advantage in the good whose opportunity cost is lower: what it gives up of the other good to make one more unit.

Benefits and costs of international trade Economics

Opportunity costs (the unrealized profit or loss) arise when the order never fills, and the price moves as expected without you.

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

The optimal capital structure is the mix at $D^*$, the debt level where the marginal tax benefit equals the marginal expected distress cost.

Optimal and target capital structure, pecking order and agency costs Corporate Finance

The optimal investor portfolio is where an investor's highest reachable indifference curve is tangent to the CAL.

The capital allocation line and the optimal portfolio Portfolio Construction

Once a risk-free asset exists, the best risky portfolio is not the minimum-variance one. It is the frontier portfolio with the highest Sharpe ratio, the optimal risky portfolio.

The minimum-variance portfolio and the efficient frontier Quantitative Methods

The usual reason to split is to keep the price per share inside an optimal trading range. A very low or very high price hurts trading through the bid–ask spread (covered in Learning Module 3, Equity Issuance and Trading).

Dividends, share repurchases, stock splits and the dividend timetable Equities

The optimization inputs are expected returns, volatilities, and correlations or covariances, plus the investor's risk tolerance, capacity and willingness to bear losses, time horizon and cash needs.

The minimum-variance portfolio and the efficient frontier Quantitative Methods

The buyer (long, holder) pays an option premium upfront: c₀ for a call, p₀ for a put. The seller (short, writer) receives it.

Call and put options: payoff and profit at expiration Derivatives

The option pricing model inputs are the exercise price, the share price, expected volatility, the expected life of the award, expected forfeitures, the dividend yield and the risk-free rate.

Share-based compensation: stock grants, options and SARs Financial Statement Analysis

Add it to the flat price of the callable bond and you have the option-adjusted price: the price of the same bond with the call removed.

Yield to call and yield to worst Fixed Income

The Z-spread therefore includes compensation for the option the investor has sold. The option-adjusted spread takes it out.

G-spread, I-spread, Z-spread and option-adjusted spread Fixed Income

The option-adjusted yield is the market discount rate at which the bond is priced at that option-adjusted price.

Yield to call and yield to worst Fixed Income

The treasury stock method handles options and warrants. Assume they are exercised, then assume the exercise cash is used to repurchase shares at the average market price.

Diluted EPS: if-converted and treasury stock methods Financial Statement Analysis

Its rules aim at liquidity and transparency: scheduled trading hours every business day and an order matching system that pairs buy and sell orders.

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

An order-dependent test rests on how observations are paired, so re-pairing them changes the result.

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

Because orders meet in a central book, an exchange is an order-driven market.

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

An order-independent test treats each sample as a set: shuffle the dates and the statistic does not change. An order-dependent test rests on how observations are paired, so re-pairing them changes the result.

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

Ranks suit ordinal data, which carry order but not size, such as credit grades. Counts suit categorical data, which are labels such as sector or rating band.

Parametric vs non-parametric tests Quantitative Methods

In an ordinary annuity the first payment arrives at the end of the first period. Discount each payment and add, or use the closed form for the present value (PV).

Annuities and level-payment loans Quantitative Methods

Investors usually pay tax on coupons as ordinary income, the rate that applies to salary. Some bonds are exempt: US municipal bonds, for example, are often free of federal income tax.

Domestic, foreign and Eurobonds, and how bonds are taxed Fixed Income

Fitting the line this way is called ordinary least squares (OLS) regression, and we say Y is regressed on X. One independent variable makes the regression simple; two or more make it a multiple regression, which is beyond this module.

The regression line: slope, intercept and least squares Quantitative Methods

Organic growth is the part that comes from the existing business: volume and price/mix only.

Building a sales-based pro forma income statement Financial Statement Analysis

Every for-profit business picks a legal organizational form, and the choice decides who runs the business, who bears the losses, who pays the tax and how far it can grow.

Organizational forms of businesses Corporate Finance

A bond issued below par has an original issue discount (OID): par minus the issue price. The discount is the interest on a zero-coupon bond, and countries treat it differently.

Domestic, foreign and Eurobonds, and how bonds are taxed Fixed Income

Customers buy scooters on credit. The loans are created and Vireo is the originator.

The securitization process and its parties Fixed Income

Other comprehensive income is the set of gains and losses that go straight to equity and bypass net income.

Common-size income statements and margin ratios Financial Statement Analysis

Retiree health care and similar other post-employment benefits are accounted for like defined benefit plans, but they are usually not funded in advance, so the obligation is mostly unfunded and payments are made as they fall due.

Defined contribution vs defined benefit pension plans Financial Statement Analysis

Logs are the usual choice; other transformations such as squares, reciprocals and differences (changes instead of levels) can also straighten a relationship.

Functional forms: log-lin, lin-log and log-log models Quantitative Methods

Place the integrity of the investment profession and the interests of clients above your own personal interests.

The six principles of the Code of Ethics Ethical and Professional Standards

An option is in the money (ITM) when exercising would pay, at the money (ATM) when S = X, and out of the money (OTM) when exercising would not pay.

Exercise value, moneyness and time value Derivatives

The defenses: fix the hypothesis and the data before testing (confirmatory testing), confirm with repeat tests, validate on data the strategy has never seen (out-of-sample validation), report every test you ran, and follow ethical reporting standards.

P-values, p-hacking and critical values from software Quantitative Methods

If exercising now would give a positive payoff, the option is in-the-money. If it would give nothing, the option is out-of-the-money.

Call and put options: payoff and profit at expiration Derivatives

An outlier is an observation that differs markedly from the rest. It can come from a measurement or data-entry error, a sampling error, or simply the natural variability of returns.

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

In the common version the outlier fences sit 1.5 IQR beyond the box. Any point past a fence is flagged as an outlier.

Quartiles, percentiles and box plots Quantitative Methods

Outliers. An outlier from a one-time item is a peer whose multiple is distorted by an unusual gain or loss.

Choosing a peer group for multiples Equities

Peers far from the middle are more likely to be mispriced or wrongly included, so they are the outliers to examine.

Valuing with multiples: comparables and forecasted fundamentals Equities

A spot transaction settles in about two business days at today's rate. An outright forward settles on a future date at a rate fixed today.

The foreign exchange market and who trades in it Economics

IV(B) asks whether pay or benefits compete with, or conflict with, your employer's interests, and requires written consent.

Standard IV(B): Additional Compensation Arrangements Ethical and Professional Standards

Bond trading is mostly quote-driven and over-the-counter. Dealers quote a bid (the price at which they buy) and an offer (the price at which they sell), increasingly on electronic platforms.

Primary and secondary bond markets vs equity markets Fixed Income

An over-the-counter (OTC) derivative is a contract made directly between an end user, such as a company or fund, and a dealer, usually a bank.

OTC vs exchange-traded derivatives and central clearing Derivatives

The over-the-counter (OTC) market is a network of broker-dealers that buy and sell among themselves, with no central matching system.

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

The pool is worth more than the bonds, often by a legal minimum of a few percent.

Covered bonds Fixed Income

Overconfidence bias is unwarranted faith in your own abilities. It shows up as ranges that are too narrow: a range you call 90% certain should miss one time in ten, yet such ranges miss far more often in practice.

Behavioral biases in analyst forecasts and how to fix them Financial Statement Analysis

Overfitting happens when the model learns the training data too precisely. It is overtrained: noise is treated as signal, so it discovers false relationships.

AI and machine learning: supervised, unsupervised, reinforcement, deep Quantitative Methods

When demand exceeds supply, an oversubscribed issue must be allocated pro rata: each eligible order receives the same fill ratio, at the same price, on a round-lot basis to avoid odd lots.

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

If $P_t < IV_t$, the share is undervalued. If $P_t > IV_t$, it is overvalued.

Market price, intrinsic value and perceived value Equities

The own-history comparison checks whether the company's performance is deteriorating or improving in a way that may continue.

Trailing, current and forward multiples Equities

In indirect farmland vehicles, the owner and owner-operator models split the risk. An owner rents out row-crop land and receives mostly fixed cash flows.

Raw land, timberland and farmland as investments Alternative Investments

In a private company the owners often run it, or control its board. This owner-manager overlap is the opposite of a large listed company, where thousands of shareholders hire managers to run the business for them.

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

Owner–manager separation means the people who own the corporation need not run it. Shareholders elect a board of directors.

Key features of corporate issuers Corporate Finance

The ownership structure of a manager affects how it keeps and rewards key staff. Most firms are privately owned, often by founders and senior people, structured as limited liability companies or partnerships.

The asset management industry Portfolio Construction