CFA® glossary: P

72 terms beginning with P.

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P-value

The probability of a result at least as extreme as the one observed if the null hypothesis were true. The null is rejected when it falls below the significance level; it is not the chance the null is true.

Pairs trading

Buying one security and shorting a closely related one when their prices stray from their usual relationship, expecting it to return. Market exposure largely cancels; the risk is that the relationship has changed. Where it appears →

Par bond

A bond priced at 100 because its coupon rate equals its yield to maturity. Rate trees are calibrated to reprice par bonds, and a swap's fixed leg is priced like one. Where it appears →

Par curve

The coupon rate at which a bond of each maturity would price at face value. One of three presentations of a single term structure. Where it appears →

Parametric test

A hypothesis test about a population parameter such as a mean or variance that relies on assumptions about the distribution, as t-, z-, chi-square and F-tests do. More powerful when those assumptions hold.

Participation rate

The share of the working-age population in the labour force. A fall can flatter the unemployment rate, because people who give up looking stop being counted as unemployed. Where it appears →

Path-dependent option

An option whose payoff depends on the route the price took, not just where it ended, such as one paying on the average price. Usually valued by simulation, as no closed-form solution exists.

Pathwise valuation

Valuing a bond by discounting its cash flows along every possible rate path through a tree and averaging the results. It matches backward induction and handles cash flows that depend on the path.

Payout ratio

Dividends as a share of earnings. One minus it is the retention ratio, which with ROE sets sustainable growth; a target payout is the long-run ratio a stable dividend policy moves towards. Where it appears →

Peer group

The set of comparable companies a firm is benchmarked against, ideally sharing its industry and business model. Chosen badly, it makes every ratio comparison misleading. Where it appears →

Peg ratio

The P/E divided by the expected earnings growth rate in per cent. A lower value suggests cheapness relative to growth, but it assumes a straight-line link and ignores risk and how long growth lasts. Where it appears →

Percentage-of-volume

An execution algorithm that trades a fixed share of market volume as it happens, so the order speeds up when the market is busy and slows when it is quiet. When it will finish is not known in advance.

Performance examination

An optional engagement in which an independent verifier tests a specific composite or pooled fund report, including its calculations. Separate from, and narrower than, firm-wide verification.

Performance obligations

A contract's promises to transfer distinct goods or services to the customer. Revenue is recognised as each is satisfied, so how a contract is split into them decides when revenue appears.

Permissioned

Describing a distributed ledger that only approved, identified participants may join and update. Most ledgers financial institutions actually run are of this kind, unlike open, permissionless networks.

Permutation

An ordered selection: r items chosen from n where the order matters. Their number is r factorial times the matching combination count, so it is the larger whenever more than one item is chosen.

Perpetuity

A level payment that continues forever. Its present value is simply the payment divided by the discount rate, because payments far enough away are worth almost nothing today. Where it appears →

Persistence factor

A number ω between zero and one giving how much of residual income carries into the next year. Zero means it vanishes after the forecast horizon; one means it continues at the same level. Where it appears →

Pip

The smallest increment in an exchange rate quote, usually the fourth decimal place, or the second for the yen. Bid–offer spreads and forward points are quoted in them.

Plagiarism

Presenting another's work — words, charts, models or analysis — as one's own without acknowledging the source. The Standards treat it as a form of misrepresentation. Where it appears →

Point estimate

A single figure offered as the best estimate of an unknown quantity. On its own it says nothing about how uncertain that estimate is, which is what an interval is for. Where it appears →

Policy rate

The short-term interest rate a central bank sets or targets to conduct monetary policy. It anchors the short end of the yield curve, so markets price in its expected path. Where it appears →

Policy trilemma

The constraint that a country cannot have a fixed exchange rate, free capital movement and an independent monetary policy all at once. Any two are possible; choosing a regime means choosing which to give up. Where it appears →

Portability

Carrying a track record to a new firm. Under GIPS it is allowed only if substantially all the decision-makers move, the process stays intact and independent, and the new firm holds records supporting the results.

Portfolio balance approach

A view of exchange rates in which investors hold a country's assets only at the right expected return. Persistent fiscal deficits add to their supply, so the currency eventually weakens or yields must rise. Where it appears →

Portfolio perspective

Judging an investment by what it adds to the risk and return of the whole portfolio rather than by its own characteristics. A volatile asset can lower total risk if it moves against the rest.

Post-audit

The final step in capital allocation: comparing a project's actual results with the forecasts used to approve it. The only way systematic optimism in proposals is ever detected.

Post-earnings-announcement drift

Prices continuing to move in the direction of an earnings surprise for weeks after it is announced. A persistent anomaly cited against semi-strong efficiency.

Potential gdp

The output an economy can produce with its labour and capital fully employed without pushing inflation up. It is not observed, and its growth sets the long-run trend for earnings and asset returns. Where it appears →

Power of attorney

A legal document authorising someone to act for another, for example over their finances if they lose capacity. Arranged in advance, it avoids a court having to appoint someone. Where it appears →

Precious metals

Gold, silver, platinum and palladium. Gold above all is held partly as a store of value, so real interest rates and inflation fears move its price as much as industrial demand does.

Preclearance

Approval from compliance before an employee makes a personal trade, so a conflict with client or firm activity is caught before the trade rather than after it. Where it appears →

Prediction interval

The range around a regression forecast likely to contain the actual outcome. It reflects both the scatter of the data and error in the estimated coefficients, and widens as the input moves away from its sample mean. Where it appears →

Preference share

A share ranking ahead of ordinary shares for dividends and in liquidation, usually with a fixed dividend and no vote. If cumulative, missed dividends must be paid first, and it behaves more like a bond. Where it appears →

Preferred habitat theory

The view that investors favour particular maturities but will move to others if paid enough. It allows curves of any shape, since premiums depend on supply and demand at each maturity.

Prepaid expenses

Costs paid ahead of the period they relate to, such as rent or insurance, held as an asset until used up. An increase means cash left before the expense was recognised.

Prepayment

Borrowers repaying a mortgage early, overwhelmingly when rates fall. The homeowner holds the option and the investor is on the other side of it. Where it appears →

Present value

What an amount arriving later is worth today, once the cost of waiting is taken off. Where it appears →

Present value of growth opportunities

The part of a share's value that comes from future investments rather than existing earnings: price minus next year's earnings over the cost of equity. Positive only if the company reinvests above its cost of equity.

Presentation currency

The currency in which a group presents its consolidated financial statements. A subsidiary's statements are translated into it when its functional currency is different. Where it appears →

Pretraining

The first stage of training a language model: reading a very large body of text and learning to predict the next token. The text supplies its own answers, so no human labelling is needed.

Price currency

The currency in which an exchange rate is stated: the number of its units needed to buy one unit of the base currency. A currency forward's mark-to-market value is also in it. Where it appears →

Price discovery

The process by which trading reveals what the market thinks something is worth. Derivatives often lead it, being cheaper to trade and open when the underlying is not. Where it appears →

Price-to-earnings ratio

Price per share over earnings per share: what the market pays for a unit of profit. A high one can mean growth is expected or earnings are depressed, and it is meaningless as earnings near zero. Where it appears →

Price-weighted

An index that adds share prices, so a high-priced company sways it regardless of size — and a share split changes the answer with no economics behind it. Where it appears →

Pricing power

The ability to raise prices without losing much volume. It comes from concentration, differentiation or switching costs, and shows up as margins that hold when costs rise. Where it appears →

Primary beneficiary

Under US GAAP, the party that directs a variable interest entity's significant activities and absorbs its losses or receives its benefits. It must consolidate the entity.

Primary market

Where a company sells newly issued securities and receives the cash. The only point at which dealing in its shares raises money for the business. Where it appears →

Principal components analysis

Turning many correlated features into a few uncorrelated composites, the principal components, ranked by how much of the variance each explains. It reduces dimension at the cost of interpretability. Where it appears →

Prior probability

The probability of an event before the latest evidence is weighed. Bayes' formula updates it into a posterior, and ignoring it makes a rare event look common whenever a test flags it.

Private key

The secret code that authorises transactions from a digital-asset wallet. Whoever holds it controls the asset, and if it is lost or stolen the asset is usually gone for good.

Private placement

A sale of securities to a small group of investors rather than to the public, with lighter registration. For investment staff, taking part is a conflict that needs preclearance. Where it appears →

Probability of default

The chance a borrower fails to pay. One half of credit risk; how much is lost when it happens is the other. Where it appears →

Probability tree

A diagram with scenario probabilities on the first branches and conditional outcomes beyond them. Multiplying along a path gives the joint probability of reaching its end.

Probate

The court process that validates a will and oversees the transfer of a deceased person's assets. It can be slow, costly and public, so assets are often held in ways that pass outside it, such as trusts.

Producer surplus

The price sellers receive less the lowest price they would have accepted, summed over every unit sold. On a diagram it is the area between the price and the supply curve.

Professional conduct program

How CFA Institute enforces the Code and Standards against members and candidates: an inquiry, an investigation by Professional Conduct staff and, where warranted, a sanction. It runs separately from any legal case. Where it appears →

Professional conduct statement

The declaration in which members, each year, and candidates, on registering, disclose matters such as complaints, litigation or regulatory proceedings concerning their conduct. What it reveals can open an inquiry. Where it appears →

Proprietary trading

Trading for the firm's own account rather than for clients. While the firm holds inside information it needs closer review, though stopping it altogether could itself signal the information. Where it appears →

Protective put

Owning the underlying and buying a put on it, so losses below the exercise price are covered. Insurance, with the premium as its cost, paid whatever happens. Where it appears →

Proxy adviser

A firm selling research and voting recommendations to institutional investors while owning no shares. Its influence worries critics, because votes can follow a generic policy rather than analysis.

Proxy contest

A campaign in which a shareholder seeks other shareholders' votes to elect its own candidates to the board against management's. The most forceful activist tactic short of litigation.

Proxy voting

Voting the shares held for a client at company meetings. Under the Standards it is part of the duty of loyalty, and not voting needs a reasoned case that the cost to the client outweighs the benefit. Where it appears →

Public good

A good that is non-rival, so one person's use leaves as much for others, and non-excludable, so those who do not pay are hard to keep out. Markets tend to supply too little of it.

Public market equivalent

A comparison of a private fund with a public index that invests the fund's own cash flows in the index, so both face the same timing. A ratio above 1, or a positive spread, means the fund beat the index. Where it appears →

Pull to par

A bond priced away from face value drifting toward it as maturity approaches, with yields unchanged. A premium bond is meant to lose value.

Purchasing power gain

The gain from holding net monetary liabilities during inflation, because they are repaid in money worth less. Net monetary assets suffer a matching loss.

Purchasing power parity

The idea that exchange rates adjust to equalise what money buys in each country. The relative version has the exchange rate moving with the inflation differential; it holds loosely, and mainly over long horizons. Where it appears →

Put option

The right, but not the obligation, to sell the underlying at the exercise price. The holder's gain is capped at the exercise price less the premium, because the underlying cannot fall below zero. Where it appears →

Put spread

Buying a put and writing one at a lower strike. As a bear put spread it backs a moderate fall cheaply; as a hedge it cuts the premium, but protection stops at the lower strike. Where it appears →

Put-call parity

A call plus cash and a put plus the share are worth the same at expiry whatever happens, so they must cost the same today. Arithmetic enforced by arbitrage, not a model. Where it appears →

Putable bond

A bond the holder may sell back at a set price. They will when rates rise, so it holds its value up and pays a lower yield. Where it appears →