Ethics, Quantitative Methods, and Finance Professional Standards

Comprehensive vocabulary flashcards covering Ethics, Quantitative Methods, Economics, Portfolio Management, and Financial Analysis for investment professionals.

Ethics

A set of moral principles or rules of conduct providing guidance for behavior.

Ethical conduct

Behavior that follows moral principles and balances self-interest with in/direct consequences on others.

Standards of Conduct

Established minimally acceptable or benchmark behaviors required by a group to enhance the Code of Ethics.

Fiduciary duty

The obligation of a profession to act in the best interest of another party (client-focused).

Mosaic theory

The use of non-material and non-public information combined with public information to reach an investment conclusion, which is considered acceptable behavior.

Market Manipulation

Distorting price or trading volume to mislead market participants, which is prohibited under Standards of Professional Conduct.

Holding Period Return (HPR)

The return for a single year calculated as $(P_1 - P_0 + \text{additional income}) / P_0$, or for multiple years as $(1+r_1)(1+r_2)... - 1$.

Money weighted return

The Internal Rate of Return (IRR) where the present value of future after-tax cash flows equals zero; size and timing of cash flows matter.

Annuity due

A finite level of cash flows (PMT) indexed at $t = 0$ (beginning of the payment period).

Harmonic Mean ($X_h$)

A measure of central tendency used to average ratios where outlier influence is smaller, calculated as $n / \text{sum}(\frac{1}{X_i})$.

Coefficient of variation (CV)

A measure of relative dispersion calculated as the standard deviation divided by the mean ($s / \bar{X}$), representing risk per unit of reward.

Leptokurtic

A distribution with kurtosis $> 3$ (fat-tailed), having a higher peak and larger deviations from the mean compared to a normal distribution.

Bayes’ formula

A formula used to update the probability of an event given new information, expressed as $P(A|B) = \frac{P(B|A)P(A)}{P(B)}$.

Covariance ($\text{Cov}(R_i, R_j)$)

A measure that shows how the joint variability and co-movements of returns affect aggregate portfolio variance; values range from $-\text{inf}$ to $\text{inf}$.

Central Limit Theorem

The principle that a larger sample (around 30) allows for a normal distribution with a similar mean and a sample standard error of $\frac{\text{sigma}}{\text{sqrt}(n)}$.

Type 1 error ($\text{alpha}$)

The significance level, also known as a false positive, where the null hypothesis is rejected even though it is true.

Coefficient of determination ($R^2$)

The percentage of variation of the dependent variable ($Y$) explained by the independent variable ($X$), calculated as $\text{SSR} / \text{SST}$.

Homoskedasticity

An assumption of simple linear regression where the variance of regression residuals is the same for all observations.

Monopolistic Competition

A market structure characterized by unique products, lower barriers to entry, negatively sloped demand curves ($P > MR$), and the use of advertising to help profit.

Nash equilibrium

A situation in an oligopoly where collusion or a cartel allows higher prices and no firm can increase profits by unilaterally changing its production level.

Ricardian equivalence

The theory that private sector agents offset fiscal deficits by increasing savings in anticipation of future increased taxes, making monetary policy sometimes more effective.

Neutral rate of interest

The sum of the real trend of growth and the long-run expected stable inflation.

Autarky

A state of political self-sufficiency with no international trade, often utilizing tariffs, quotas, and state-owned enterprises.

Global Minimum Variance Frontier

The portfolio on the efficient frontier with the lowest possible volatility for the underlying assets.

Sharpe Ratio

A reward-to-variability ratio calculated as $[E(R_m) - R_f] / \text{sigma}_p$, measuring the excess return per unit of total risk.

Security Market Line (SML)

The graphical representation of the CAPM, where the x-axis is systematic risk (beta) and the y-axis is expected return.

Standardized IPS (Investment Policy Statement)

A document including investment objectives, constraints, and guidelines that serves as a plan for a client's portfolio construction and evaluation.

Discretionary fiscal adjustments

Policy changes such as tax modifications or spending cuts that require active government intervention, as opposed to automatic stabilizers.

Deferred Tax Liability (DTL)

A balance sheet item created when carrying amount is greater than the tax base for an asset, or carrying amount is less than the tax base for a liability.

Goodwill

A non-identifiable intangible asset recognized when the company purchase price exceeds the fair value of net identifiable assets acquired.

Finance Lease (FL)

A lease that essentially transfers ownership of the underlying asset to the lessee, requiring the lessee to report an asset and a liability on the balance sheet.

Macaulay duration

The present value weighted average holding period until the receipt of cash flows that balances reinvestment risk and price risk.

Gordon Growth Model (GGM)

A model for valuing mature, low-growth companies using the formula $V_0 = \frac{D_1}{r - g}$.

Contango

A condition in commodity markets where the spot price is lower than the forward futures price ($S < F$) and the convenience yield is zero or low.

Tokenization

The process of representing ownership rights to physical assets on a blockchain or distributed ledger.