CFA® glossary: B

47 terms beginning with B.

ABCDEFGHIJKLMNOPQRSTUVWYZ0-9

Backfill bias

Upward bias from adding a fund's earlier returns to a database when it starts reporting. Managers tend to begin reporting after good results, so the history added is mostly flattering. Where it appears →

Backward induction

Valuing an instrument on a tree by starting at maturity, where cash flows are known, and working back node by node: average the next values plus cash flows, then discount at that node's rate. Where it appears →

Backwardation

A futures curve sloping down, with contracts for later delivery cheaper than the spot price. Rolling a long position forward then earns money. Where it appears →

Balance of payments

The record of a country's transactions with the rest of the world, chiefly in the current and financial accounts. It balances by construction, so a current account deficit is always matched by borrowing or asset sales abroad. Where it appears →

Barbell

A bond portfolio concentrated at short and long maturities with little in between, unlike a bullet clustered around one maturity. For the same duration it has more convexity, which pays when rates move a lot. Where it appears →

Bargaining power

How far suppliers or buyers can push prices in their own favour. Greater when they are concentrated, or when they can switch easily and the other side cannot. Where it appears →

Barriers to entry

Anything that stops new firms entering a profitable market, such as scale, patents, licences or control of distribution. They decide how much pricing power incumbents keep, more than concentration does. Where it appears →

Base currency

The currency being priced in an exchange rate quote: the quote gives the units of the price currency needed to buy one unit of it. Dealers' bids and offers are to buy and sell it. Where it appears →

Basis point

A hundredth of a percentage point. A rate moving from 4.00% to 4.25% has moved 25 of them. Where it appears →

Basis point value

The change in a position's value for a one basis point change in yield: money duration × 0.0001. A hedge is sized so its value is equal and opposite to that of the exposure. Where it appears →

Basis risk

The risk that a hedge and the exposure it protects do not move together, usually because the hedge is on a related but different asset, date or place. It is what remains once the hedge is on. Where it appears →

Bayes formula

The rule for revising a probability when new evidence arrives: the prior is scaled by how likely the evidence is if the event is true, relative to how likely the evidence is overall.

Bear flattening

A rise in yields that is larger at the short end than the long end, so prices fall and the curve flattens. Typical of a credible monetary tightening.

Beneficial ownership

Having the economic benefit of a security, whether or not it is held in one's own name; a family member's holding can count. Owning what one covers or recommends is a conflict to avoid where possible, or disclose. Where it appears →

Beneish m-score

A score estimating the probability of earnings manipulation from eight variables, such as receivables growth against sales, gross margin and accruals. Higher means more likely; it flags companies to examine, not proof. Where it appears →

Best execution

The duty to seek the most favourable terms reasonably available for a client's trade, weighing price, cost, speed, likelihood of execution and settlement, not commission alone. Where it appears →

Best practice

Conduct the Standards recommend but do not require. Not following a recommended procedure is not itself a violation, though it can make one more likely. Where it appears →

Best-in-class

An ESG approach that selects the companies rated highest on ESG within each sector rather than excluding sectors, so sector weights stay close to the benchmark. Where it appears →

Beta

How much an asset moves when the market moves. One means with it, above one amplifies it, below one damps it — and it is the only risk the market pays you to hold. Where it appears →

Big bath

Taking unusually large charges in one bad year, often around a change of management, so later years look better, partly as excess provisions are released.

Big data

Datasets too large or fast-arriving for conventional tools, described by volume, velocity and variety, with veracity added for reliability. Much of it is unstructured text, images or sensor readings.

Bill-and-hold

An arrangement in which a seller bills for goods but keeps them for later delivery. Legitimate in narrow cases, but a known way to recognise revenue before it is earned.

Binomial distribution

The distribution of the number of successes in a fixed number of independent trials, each with the same probability of success. Its mean is the number of trials times that probability.

Binomial interest rate tree

A tree of possible one-period rates at each future date, calibrated so that it reprices benchmark bonds. Bonds with embedded options are valued on it by backward induction.

Binomial tree

A lattice in which a price or rate moves to one of two values each period. Options, and bonds with embedded options, are valued on it by working backward from the final nodes. Where it appears →

Black model

A version of Black–Scholes–Merton for European options on futures or forwards. The futures price takes the place of spot and is discounted along with the strike, since a futures contract costs nothing to enter. Where it appears →

Blackout period

A period, such as around client orders or changes in research views, when staff may not trade the affected securities for themselves, removing the chance to trade ahead of clients. Where it appears →

Black–litterman model

Starts from the returns implied by reverse optimisation and blends in the investor's own views, each weighted by the confidence placed in it. The allocations stay closer to market weights than unconstrained optimisation gives. Where it appears →

Bond ladder

A bond portfolio with roughly equal amounts maturing at regular intervals. Maturing bonds provide cash or are reinvested at the long end, spreading reinvestment risk, though the portfolio still carries duration.

Book value per share

Common shareholders' equity divided by shares outstanding, the denominator of the P/B ratio. A buyback at a price above it lowers it for the holders who remain; one below it raises it. Where it appears →

Bootstrap resampling

Simulation drawing observed returns at random with replacement to build far more paths than history supplies. It keeps the empirical distribution, but no single draw can be worse than the worst observation.

Bootstrapping

Deriving spot rates one maturity at a time from par or coupon bond prices, using the spot rates already found to value each bond's earlier cash flows.

Breadth

In the fundamental law of active management, the number of independent active decisions made per year. Many correlated bets count as fewer independent ones. Where it appears →

Break-even inflation rate

The yield on a conventional government bond minus the real yield on an inflation-indexed bond of the same maturity. It combines expected inflation with an inflation risk premium, so it is not a pure forecast.

Breakeven quantity

The volume at which revenue just covers costs. Fixed operating costs over contribution margin per unit gives the operating version; adding fixed financing costs gives the point where net income is zero.

Breusch–pagan test

A test for conditional heteroskedasticity: regress the squared residuals on the independent variables, and n times that regression's R² follows a chi-square distribution.

Brinson–fachler model

An attribution model splitting active return by sector into allocation, selection and interaction effects. Allocation uses each sector's benchmark return relative to the whole benchmark's, so only overweighting sectors that beat it helps.

Brinson–hood–beebower

An attribution model like Brinson–Fachler but measuring allocation with each sector's own benchmark return, not its excess over the total, so overweighting any sector with a positive return looks helpful.

Brokered market

A market where a broker searches for a counterparty to take the other side, as unique or very large positions such as property or blocks of shares require.

Brownfield

An infrastructure asset already built and operating, with a record of cash flows. Its risks are mainly operational and regulatory, so it sits at the lower-risk end of infrastructure. Where it appears →

Build-up method

Estimating a required return on equity by adding premiums to the risk-free rate, such as the equity risk premium and a size premium, without multiplying by a beta. Common for private companies.

Bull call spread

Buying a call and writing one at a higher strike, a cheaper way to back a moderate rise. The most it can make is the gap between the strikes less the net premium; the most it can lose is that premium.

Business cycle

The swing of output around its trend through expansion, peak, contraction and trough. It describes the fluctuation, not the growth underneath it. Where it appears →

Buy-sell agreement

An agreement among a business's owners that an owner's share will be bought by the others or the company on death, disability or departure, at a set price or formula and often funded with life insurance.

Buy-side

Asset managers and funds, whose analysts research for the firm's own portfolios. Their work stays internal and is judged by investment results rather than by readership. Where it appears →

Buying on margin

Financing part of a share purchase with a loan from the broker. It magnifies both gain and loss, and equity falling below the maintenance requirement brings a margin call.

Buying protection

Paying the premium on a credit default swap in return for a payout on a credit event: a short credit position that gains when spreads widen. Selling protection is the opposite, long credit. Where it appears →