Glossary: terms starting with C

Compound annual growth rate: the average annual return including compounding.

Example: $10,000 grows to $16,105.10 in five years. That corresponds to a CAGR of 10.00%.

More: CAGR: how to calculate the average annual return correctly

A return pattern tied to a fixed date (half-year, month, day of the week, turn of the month or holiday) rather than to new information. Because a great many such rules can be tested, chance findings are common; effects that are significant on their own often do not survive a correction for the search.

Source: Sullivan et al. (2001)

More: Stock market seasonality: Sell in May, the January effect and how to test calendar effects

Returning to the target weights at fixed intervals, e.g. once a year. Simple and predictable, but blind to large deviations between the dates; the alternative is tolerance-band rebalancing.

Source: Perold and Sharpe (1988)

More: Rebalancing: getting your portfolio back on course

Call option: makes money when the underlying rises above the strike price plus the premium paid. The buyer's loss is limited to the premium.

More: Option pricing: where fair option prices come from

CAGR divided by the absolute value of the maximum drawdown.

Example: A 6% CAGR and a −20% maximum drawdown give 0.30.

More: Sortino ratio and Calmar ratio: measuring downside risk

Attribution for fixed income portfolios following Campisi: the return is broken down into income, a treasury effect from changes in government bond yields, a spread effect from changes in risk premiums, and selection, each relative to the benchmark.

Source: Campisi (2000)

More: Multi-asset attribution: weighting schemes, top-down and bottom-up, currencies and overlays

A Japanese candlestick display showing the open, high, low and close for each period. Patterns such as the doji, hammer, engulfing or morning star are said to signal reversals; research finds mixed evidence for this, and weak evidence after costs.

Source: Caginalp and Laurent (1998); Marshall et al. (2006)

More: Technical analysis, chart patterns and candlesticks from a quant perspective

Cyclically adjusted price-to-earnings ratio: price divided by the inflation-adjusted average earnings of the last ten years.

More: Shiller P/E (CAPE): how expensive is the stock market?

Capital call (drawdown, contribution): the fund requests part of the commitment, usually at short notice, for purchases, costs and fees; the total is called paid-in or called capital. Distribution: money flowing back to investors from sales, dividends or interest. The Yale model by Takahashi and Alexander plans both flows.

Source: Takahashi and Alexander (2002)

More: Measuring private markets: J-curve, cash flows, smoothing and public proxies

Amount an investor bindingly commits to a closed-end fund (commitment). The fund draws it down step by step; the part still outstanding (unfunded commitment) must be kept available. Allocation and liquidity planning therefore depend on commitments, called capital and NAV at the same time.

More: Measuring private markets: J-curve, cash flows, smoothing and public proxies

Sale proceeds minus the purchase price (cost basis) and the costs of buying and selling.

Source: InvStG (2016)

The straight line from the risk-free rate to the tangency portfolio in the risk-return diagram. Its slope is the Sharpe ratio of the market portfolio; mixes of money market and market portfolio lie on it.

Source: Sharpe (1964)

More: CAPM: the capital asset pricing model and the security market line

A certificate that repays at least the nominal value at maturity and participates in price gains. Decomposed: a zero-coupon bond of the issuer plus a call. The protection only holds as long as the issuer pays.

Example: 2% interest rate, five years: the zero-coupon bond costs 1,000 / 1.02⁵ = $905.73; $94.27 remains for the call and the margin.

Capital Asset Pricing Model: expected return = risk-free rate + beta × market risk premium. Only market risk, which cannot be diversified away, is rewarded.

Source: Sharpe (1964); Lintner (1965); Mossin (1966)

More: CAPM: the capital asset pricing model and the security market line

A company's emissions per million dollars of revenue or enterprise value. For funds, the weighted average (WACI) is common: the sum of weight times emissions divided by revenue.

Example: 10% in a utility with 1,200 t per $m of revenue and 90% in companies with 100 t: 0.1 × 1,200 + 0.9 × 100 = 210 t per $m.

More: ESG ETFs: index rules, ratings, returns and the limits of sustainable funds

Four-factor model of market, size, value and momentum. With it, many apparent successes of active funds disappear, because the funds simply held momentum stocks.

Source: Carhart (1997)

More: Factor investing: understanding the Fama-French factors · Methodology: Factor regression, factor allocation and factor statistics: methodology

The fund manager's share of profits, according to Kaplan and Strömberg (2009) almost always 20% of the profits, usually only after the capital and a preferred return have been paid back. In the European model (whole fund), it applies to the fund as a whole; in the American model (deal by deal), to each holding, then with a clawback in case losses follow later.

Example: Capital 100, proceeds 200 after five years, 8% hurdle, full catch-up, 20% carry: manager 20.00, investors 180.00.

Source: Kaplan and Strömberg (2009); Metrick and Yasuda (2010)

More: Private equity explained: strategies, fund structure, fees and what research shows about returns

Income an asset generates if prices do not change: for bonds, coupon and roll-down; for currencies, the interest rate differential; for futures, the roll yield. Researched as a factor across asset classes.

Source: Ilmanen (2011); Koijen et al. (2018)

More: Carry trade: earning interest with currencies and bonds · Methodology: Carry backtest: methodology for FX and bond carry

Sudden large loss on carry trades when many investors unwind their positions at the same time and funding currencies appreciate strongly. This typically happens when risk appetite and funding liquidity decline. It makes carry returns negatively skewed.

Source: Brunnermeier et al. (2008)

More: Carry trade: earning interest with currencies and bonds · Methodology: Carry backtest: methodology for FX and bond carry

Strategy that borrows in low-interest currencies and invests in high-interest currencies, usually via currency forwards. It earns the interest rate differential as long as the high-yielding currency does not depreciate by more than that, and in crises it often loses a lot very quickly.

Source: Lustig and Verdelhan (2007); Brunnermeier et al. (2008)

More: Carry trade: earning interest with currencies and bonds · Methodology: Carry backtest: methodology for FX and bond carry

Buying index futures equal to a fund's cash so that inflows, dividends or a liquidity reserve participate in the market until they are invested. The cash remains invested at the money market rate and serves as collateral; what remains are basis risk and roll costs.

Example: $12 million of cash, index at 5,000 points, $10 per point: 12,000,000 / 50,000 = 240 contracts.

Source: Hull (2021)

More: Overlay management with futures: beta, duration and currency overlays, contract numbers and liquidity needs

Investment approach in which the coupons and redemptions of a bond portfolio cover the future payouts of a pension plan or insurer as closely in time as possible, usually with corporate bonds on a buy-and-maintain basis. It complements liability-driven investing rather than replacing it: interest rate, inflation and liquidity risks are still hedged by an LDI component.

Source: PLSA (2023)

More: Liability-driven investing and cash flow driven investing: covering liabilities with bonds

Selecting bonds whose payments cover at least the liabilities due on each date; surpluses are parked until the next date. Unlike immunization, this protects against any interest rate movement, but it costs more if suitable maturities are missing.

Example: Five payments of $10 million each, covered with three bonds (1, 3 and 5 years): because two gaps are bridged with non-interest-bearing cash, the portfolio costs $46.312 million instead of $45.797 million at 3% interest.

More: Liability-driven investing and cash flow driven investing: covering liabilities with bonds

The state of a CPPI after a crash down to the floor: everything is held in safe assets, and with no cushion left the rule buys no more equities. If the floor grows with the interest rate, this often remains so during the recovery as well.

More: CPPI: portfolio insurance with cushion, floor and multiplier · Methodology: CPPI backtest: methodology

The CDS premium minus the spread of a bond from the same debtor, usually the Z-spread or asset swap spread. Negative means that default protection is cheaper than the bond's spread. After the collapse of Lehman in 2008, the basis became strongly negative.

Example: CDS premium 1.80%, asset swap spread 2.50%: basis −0.70%.

Source: Bai and Collin-Dufresne (2019); Choi and Shachar (2013)

More: Basis trades: positive and negative basis in bonds, CDS and futures

Comparison portfolio of stocks with the same characteristics as a fund's holdings, such as size, valuation and momentum. It separates style from genuine stock-picking skill.

Source: Daniel et al. (1997)

More: Look-through: what is really inside your ETFs

The bond that is cheapest for the party with the delivery obligation to deliver: for bond futures, among all deliverable bonds according to their conversion factor; for CDS, among the debtor's deliverable bonds. This choice has a value that is reflected in prices.

Source: Hull (2021)

More: Basis trades: positive and negative basis in bonds, CDS and futures

Strait or canal through which a large share of seaborne trade has to pass, such as the Straits of Malacca and Hormuz, the Suez Canal or the Panama Canal. In 2024, around 20 million barrels of oil a day flowed through Hormuz alone; if a chokepoint is closed, ships have to make long detours.

Source: EIA (2024); Dunn and Barden (2025)

More: Ship tracking data and satellite images: what they reveal about commodities · Methodology: Ships at chokepoints (beta): methodology

The clean price is a bond's quoted price without accrued interest; the dirty price (full price) is the price actually paid: clean price plus accrued interest. The dirty price is the present value of the future payments; the clean price does not jump on the coupon date.

More: Bond math: calculating price, yield, duration, convexity and spreads

EU climate transition benchmark: a greenhouse gas intensity at least 30% below that of the investment universe, then at least 7% lower each year; controversial weapons, tobacco and companies violating the UN Global Compact or the OECD Guidelines are excluded.

Source: EU Climate Benchmarks Regulation (2020)

More: ESG ETFs: index rules, ratings, returns and the limits of sustainable funds

A period of 30 calendar days before the announcement of an interim or year-end report during which managers may not trade in the issuer's financial instruments under Art. 19(11) MAR, either on their own account or for third parties. The issuer may allow exceptions only in narrowly defined cases.

Source: MAR (2014)

More: Insider trading: what is prohibited, what is allowed and what insider purchases reveal

The auction at the end of the trading day that determines the official closing price. Index funds trade there because net asset value and index are calculated from closing prices; on Germany's Xetra exchange, for example, the call phase begins at 5:30 p.m. local time and ends at a random point.

Source: Deutsche Börse, trading parameters (2026); Bogousslavsky and Muravyev (2021)

More: Order types and execution: from limit orders to MOC, VWAP, TAS and BTIC

Conservative minus aggressive: return of companies that invest little minus those that expand their balance sheets strongly. Part of the five-factor model.

Source: Fama and French (2015); Hou et al. (2015)

More: Factor investing: understanding the Fama-French factors · Methodology: Factor regression, factor allocation and factor statistics: methodology

Placing a trader's computers in the exchange's data center or right next to it, so that orders and market data travel the shortest possible distance. A typical feature of high-frequency trading.

Source: MiFID II, Art. 4 (2014)

The point from which your existing portfolio will grow to the FIRE number by the planned exit date without further contributions. The coast number is the discounted FIRE number: FIRE number / (1 + r)^n, with real return r and n years.

Example: $750,000 in 30 years at a 4% real return: 750,000 / 1.04^30 = $231,239.

More: FIRE (Financial Independence, Retire Early): Lean, Fat, Coast and Barista FIRE

A risk measure that satisfies four axioms, including subadditivity: the risk of two portfolios combined is never greater than the sum of their risks. Expected shortfall is coherent; value at risk is not always.

Source: Artzner et al. (1999); Acerbi and Tasche (2002)

More: Value at risk and conditional VaR: how much you could lose in a bad case

Two price series that each wander randomly on their own but keep a stable distance in the long run. The basis of pairs trading strategies; the spread reverts to its mean. It is tested, for example, with the Engle-Granger test.

Source: Engle and Granger (1987)

More: Pairs trading and statistical arbitrage: idea, methods, research · Methodology: Long/short and statistical arbitrage: methodology

Storing private keys without a connection to the internet, e.g. on a hardware device or on paper in a safe. This is hard to attack, but slow. Day-to-day trading uses a hot wallet with a network connection, which is easier to use and easier to attack.

More: Crypto in institutional portfolios: access, custody, regulation and risk budget

A hedge consisting of an asset held, a put bought below the current price and a call sold above it. The call premium pays for the put in full or in part; in return, the upside is capped.

Example: Index 100, put at 90 for 3.65, call at 110 for 3.07: net cost 0.58; the result at expiry lies between −10.58% and +9.42%.

More: Tail hedging: what put protection costs, when it pays off and what short-vol strategies teach · Methodology: Option pricer: how Portfolio Lab values options

Interest income on the cash that a fully collateralized futures index or fund holds alongside its futures, usually in short-dated government paper. Part of a commodity index's total return, alongside spot and roll return.

Example: Spot +5.00%, roll −5.81%, collateral 2%: total return 1.05 × 0.9419 × 1.02 − 1 = 0.88%.

Source: BCOM methodology (2026)

More: Active or passive in bonds and commodities: why the rules differ from equities

A method for estimating the probability of backtest overfitting: the period is divided into S contiguous blocks of equal length, and each selection of S/2 blocks forms a split into an in-sample part and an out-of-sample part of equal size. For each split, the variant that is best in-sample is chosen and its out-of-sample rank determined.

Example: S = 16 blocks give C(16, 8) = 12,870 splits, S = 4 blocks only 6.

Source: Bailey et al. (2016)

More: Probability of backtest overfitting: does the best variant deliver what the backtest promises?

Planning annual commitments to private markets funds over many vintages so that the invested share (NAV) reaches and holds a target allocation without overstretching liquidity. It is based on a forecast of calls and distributions, for example using the Takahashi-Alexander model.

Example: In the article's example, a target allocation of 15% requires commitments of 3.77% of assets per year.

Source: de Zwart et al. (2012)

More: Takahashi-Alexander model: forecasting the cash flows of private markets funds

A measure of crowding in momentum strategies developed by Lou and Polk: the correlation of the excess returns of the stocks that a typical momentum strategy bets on. When it is low, momentum has a stabilizing effect; when it has been high, the returns of momentum stocks have subsequently reversed sharply.

Source: Lou and Polk (2022)

More: Momentum crashes: why momentum collapses rarely but violently, and what volatility scaling and crowding measures show

A payment with which a seller who delivers a share only after the dividend date, or a borrower, replaces the missed dividend.

Source: Spengel (2020)

Every investment idea has to show that it improves the total portfolio, rather than filling a fixed budget for its asset class. Formally, an investment is worthwhile if its Sharpe ratio is greater than its correlation with the portfolio times the portfolio's Sharpe ratio.

Example: Portfolio with a Sharpe ratio of 0.40: an investment with a correlation of 0.5 must exceed 0.5 × 0.40 = 0.20.

Source: Filbeck and Bok (2025)

More: Strategic and tactical asset allocation and the total portfolio approach

Grouping of all mandates or funds with the same strategy under the GIPS standards. All actual, fee-paying, discretionary mandates must be included in at least one composite, so that a manager cannot show only its best accounts.

Source: CFA Institute (2019)

More: Portfolio reporting: how to report return, risk, attribution and costs properly

Income itself earns further income. That is why wealth grows exponentially: at 7% a year, it doubles in just over ten years.

More: CAGR: how to calculate the average annual return correctly

Too large a share in a single position, sector or region. Often builds up unnoticed through overlaps between several ETFs.

More: Look-through: what is really inside your ETFs

The average of the worst drawdowns beyond a threshold, analogous to CVaR for returns. It can be used as a constraint in optimizations.

Source: Chekhlov et al. (2005)

More: Maximum drawdown: the largest loss from a peak

In a stress test, the value you expect on average for the factors that are not shocked when the shocked factors take exactly their shock values: E[f₂ | f₁ = s] = Σ₂₁ Σ₁₁⁻¹ s for jointly normally distributed factors with zero mean. This keeps a scenario with few inputs internally consistent.

Example: Equities fluctuate by 4.5% a month and the yield on ten-year bonds by 0.20 percentage points, with a correlation of 0.3. An equity move of −30% is consistent, on average, with a yield change of 0.3 × 0.20 / 4.5 × (−30) = −0.40 percentage points.

Source: Kupiec (1998); Breuer et al. (2009)

More: Scenario analysis and sensitivity analysis: stress testing equity, interest rate, credit and currency risk

Average loss in the worst cases beyond the value at risk, for example in the worst 5% of months.

More: Value at risk and conditional VaR: how much you could lose in a bad case

A range that contains the true value with a chosen level of confidence (often 95%). For returns and Sharpe ratios these ranges are surprisingly wide, even with decades of data.

Information that supports your own opinion gets more attention than information that contradicts it. In investment decisions, this leads to one-sided research.

A strategy that always returns to fixed weights: it sells after rises and buys after falls. It gains in volatile sideways markets and loses against buy-and-hold in long trends.

Source: Perold and Sharpe (1988)

More: Rebalancing: getting your portfolio back on course

Upward-sloping futures curve: later contracts cost more than near-term ones. For the VIX, the normal state in calm markets.

Example: M1 at 19.6 and M2 at 20.2 give 3.1% contango.

More: VIX: how to read the stock market's fear gauge

The growth rate with continuous compounding: g = log(1 + CAGR), i.e. the mean log return per year. Unlike CAGR values, continuous growth rates can be weighted and added up over periods; that is why return decompositions like to use them.

Example: CAGR 8%: log(1.08) = 7.70% continuously compounded; two years give 2 × 7.70% = 15.39% = log(1.08²).

More: CAGR: how to calculate the average annual return correctly

Buying when most people are selling, and selling when most are buying. Behind it lies the assumption that exaggerated sentiment pushes prices away from value. John Templeton bought at the point of maximum pessimism; Howard Marks describes acting against the cycle. The difficulty is that a trend often lasts longer than you expect.

Source: Templeton and Phillips (2008); Marks (2011)

More: Legendary investors: the investment styles of the most famous investors, from Graham to Simons

Technique that reduces the random error of a Monte Carlo simulation: you also simulate a closely related quantity whose exact value is known and correct the estimator by its deviation. For Asian options, the geometric average serves as the control variate.

Example: Arithmetic Asian call with 12 fixings and 40,000 paths: standard error 0.0297 without and 0.0012 with the control variate.

Source: Kemna and Vorst (1990); Glasserman (2003)

Methodology: Option pricer: how Portfolio Lab values options

States how many units of the underlying a warrant, turbo or certificate refers to. To compare prices with options, you convert the warrant's price to one unit of the underlying by dividing it by the ratio.

Example: Ratio of 0.1: ten warrants refer to one share; $0.53 per warrant corresponds to $5.30 per share.

A rebalancing rule that buys more after gains and sells after losses, e.g. CPPI. It comes out ahead in long trends and loses in sideways markets; a concave strategy such as constant mix behaves the other way round.

Source: Perold and Sharpe (1988)

More: CPPI: portfolio insurance with cushion, floor and multiplier

Curvature of the price-yield relationship of bonds: price gains when rates fall are larger than the losses when rates rise by the same amount.

More: Duration: how strongly bonds react to interest rates

Buying the reported positions of well-known investors or funds, for example from 13F filings. The copycat saves on research and fees, but buys with a delay, sees only part of the portfolio and does not find out when the role model sells. Studies have found partly positive results in the past.

Source: Frank et al. (2004); Martin and Puthenpurackal (2005)

More: Legendary investors: the investment styles of the most famous investors, from Graham to Simons

Inflation rate excluding the volatile prices of energy and food (in the euro area usually also excluding alcohol and tobacco). It shows the underlying price trend better than the headline rate.

Methodology: Macro dashboard and regime analysis: methodology

A split into a broad, low-cost core (e.g. a global ETF) and smaller satellite holdings for themes, factors or active ideas. The core determines the risk, the satellites the deviation.

Common classification of real estate and infrastructure funds by risk. Core: existing, well-let or regulated assets with little debt, returns mainly from current income. Core-plus: somewhat more risk. Value-add: value creation through refurbishment, letting or expansion. Opportunistic: new development, special situations, high leverage. The boundaries are not standardized.

More: Infrastructure investing: equity and debt, revenue models, valuation and research

Adjusts the quantile of the normal distribution for the skewness and kurtosis of returns. This makes value at risk more realistic in the presence of negative skewness and fat tails (modified VaR).

Source: Cornish and Fisher (1938)

More: Value at risk and conditional VaR: how much you could lose in a bad case

Measure from −1 to +1 of how closely two investments move together. The lower it is, the stronger the diversification effect.

More: Correlation and diversification: why mixing assets reduces risk

The change in correlations during stress phases compared with calm periods, usually an increase, so that diversification protects less than expected. Stress tests using correlations from calm years then turn out too mild; Kim and Finger therefore estimate separate correlations for hectic days.

Source: Kim and Finger (2000); Longin and Solnik (2001)

More: Historical stress testing: how to apply past crises to your portfolio today

With a fixed contribution, you buy more units when prices are low and fewer when they are high. This lowers the average price per unit below the average market price, but it is no return advantage over a lump-sum investment.

Costs minus income from holding an underlying, expressed as a rate b: for stocks, the interest rate minus the dividend yield; for futures, zero; for currencies, the domestic minus the foreign interest rate. With b, Black-Scholes, Black 76 and Garman-Kohlhagen can be written as a single formula.

Source: Haug (2007)

Methodology: Option pricer: how Portfolio Lab values options

Where a group's net position lies between its minimum (0) and maximum (100) over recent years. Values close to 100 indicate positioning that has rarely been this one-sided.

Example: Net 120,000 contracts, range −40,000 to 160,000: (120,000 + 40,000) / 200,000 × 100 = 80.

Methodology: Sentiment: methodology for the fear and greed index, put/call ratio and COT

A weekly report by the US futures market regulator on the positions of market participants, broken down into groups such as dealers, asset managers, hedge funds and hedgers. The reference date is Tuesday; publication follows on Friday.

Source: Wang (2003)

Methodology: Sentiment: methodology for the fear and greed index, put/call ratio and COT

Risk that the counterparty to a derivative, a securities loan or a repo defaults while the transaction has a positive value for you. Collateral, netting and central clearing limit it; funds may only put a small part of their assets at risk with any single counterparty.

Source: DerivateV (2013); Gregory (2020)

More: Counterparty and issuer risk: CVA, ETCs, certificates and swaps

Classification of a country by an index provider as a developed, emerging or frontier market, based on criteria including market size and access for foreign investors. The providers judge differently: South Korea is a developed market at FTSE Russell, but an emerging market at MSCI.

Source: FTSE Russell Country Classification (2026); MSCI Market Classification (2026)

More: Index providers and valuation points: why the same index is calculated differently

A bond's annual interest as a percentage of its face value. A higher coupon lowers the duration.

More: Duration: how strongly bonds react to interest rates

Joint variation of two returns: the correlation times both volatilities. A building block of portfolio volatility and beta.

More: Correlation and diversification: why mixing assets reduces risk

A table of all variances (diagonal) and covariances (other cells) of several assets. Together with the weights it gives the portfolio variance; optimizers are very sensitive to its estimation errors.

More: Covariance estimation: why optimizers need shrinkage

Contractual condition in a loan: metrics such as debt to EBITDA must not exceed a limit (financial covenant), or certain actions such as taking on new debt or making distributions are prohibited (negative covenant). A breach allows the lender to renegotiate; loans with few conditions are called covenant-lite.

Source: Block et al. (2024)

More: Private credit and public credit compared: returns, risks and what the research shows

Holding stocks and selling calls on them. The premiums provide ongoing income, but strong price gains are capped; losses largely remain.

More: Option pricing: where fair option prices come from

The forward rate of a currency deviates from today's spot rate by exactly the interest rate differential; otherwise there would be risk-free profits. That is why a hedge costs or earns roughly this differential. It does not hold exactly: Du et al. (2018) find persistent deviations for major currencies.

Source: Du et al. (2018)

More: Carry trade: earning interest with currencies and bonds · Methodology: Carry backtest: methodology for FX and bond carry

Constant Proportion Portfolio Insurance: a fixed multiple (the multiplier) of the cushion above a lower limit, the floor, is held in equities; the rest is held in safe assets. The rule buys after gains and sells after losses.

Source: Black and Jones (1987); Black and Perold (1992)

More: CPPI: portfolio insurance with cushion, floor and multiplier · Methodology: CPPI backtest: methodology

The issue and redemption of ETF units in large blocks by authorized participants in exchange for the underlying securities or cash. This mechanism keeps the market price close to the net asset value.

Source: Ben-David et al. (2017)

More: ETF basics: costs, replication and distributions

Sensitivity of a bond fund to the excess return of corporate or high-yield bonds over government bonds. Additional credit beta relative to the benchmark brings excess return in calm years that looks like skill, and losses in crises.

Example: Additional credit beta of 0.2 and a 4% excess return on high yield: 0.2 × 4% = 0.80% excess return; with −20% in a crisis, −4.00%.

Source: Brooks et al. (2020)

More: Active or passive in bonds and commodities: why the rules differ from equities

A credit derivative in which the protection buyer pays a regular premium and the protection seller covers the loss if the debtor suffers a credit event: nominal value minus recovery rate. The premium is regarded as the market price of default risk.

Source: Hull (2021)

More: Basis trades: positive and negative basis in bonds, CDS and futures

Excess return of corporate bonds over government bonds of the same maturity as compensation for default risk. Used as the factor DEF in factor models for bonds.

Source: Fama and French (1993)

Methodology: Factor regression, factor allocation and factor statistics: methodology

Assessment of an issuer's creditworthiness by a rating agency, from AAA (best) to D (defaulted). Ratings often react sluggishly to changes.

Yield premium of a corporate or riskier government bond over a safe government bond of the same maturity. It widens in crises and reflects default risk and liquidity.

Source: Fama and French (1993)

Methodology: Risk factors in the look-through: methodology

Deduction from the value of derivative transactions for the counterparty's default risk: loss given default times the sum, over all periods, of expected exposure, probability of default and discount factor. Since Basel III, banks also hold capital against fluctuations in CVA.

Source: Hull and White (2012); Basel Committee (2011)

More: Counterparty and issuer risk: CVA, ETCs, certificates and swaps

An industry term for a strategy's gains precisely during crises in other assets, above all those of trend followers in prolonged downturns. Not guaranteed protection: sudden crashes after long rallies often catch trend followers positioned long.

Source: Fung and Hsieh (2001); Dao et al. (2017)

More: CTAs and managed futures: industry, position sizing, costs and crisis protection

In the LPPLS model, the point in time at which a bubble ends. It is the most likely crash date, not a certain one: the crash can come earlier, and the bubble can also fade out without a crash. Estimates of tc are highly uncertain.

Source: Johansen, Ledoit and Sornette (2000)

More: Speculative bubbles: what they are and how the LPPLS model detects them · Methodology: Bubble indicator (LPPLS): methodology

Hedging with a related but not identical instrument because none exists for the risk itself or it is too illiquid. How well it works is shown by the square of the correlation between portfolio and hedge.

Example: With a correlation of 0.9, the cross hedge eliminates 81% of the variance; at 20% volatility, 8.72% remains.

Source: Hull (2021)

More: Short selling, hedge funds and hedging: types and how they work

A trade between two funds or mandates of the same manager without going through the market. It saves the spread and market impact but is a conflict of interest; SEC Rule 17a-7 and, in Germany, the KAMaRisk (BaFin's risk management requirements for fund managers) require an independent, fair market price.

Source: SEC Rule 17a-7 (2005); KAMaRisk (2017); Eisele et al. (2020)

More: Market making and bond trading: spread, inventory, axes, RFQ, cross trades and matrix pricing

The data are split several times into estimation and validation parts; each piece serves once as the validation set. With time series the parts must stay separated in time, so that no future information leaks into the estimate.

Source: López de Prado (2018)

Overcrowded trades: many investors hold the same positions, e.g. the same factor portfolios. If one of them has to sell, it pushes down the prices of everyone else's positions and can trigger a chain of forced sales. The risk then lies less in the strategy itself than in who else is running it.

Source: Lou and Polk (2022); Khandani and Lo (2011)

More: Momentum crashes: why momentum collapses rarely but violently, and what volatility scaling and crowding measures show

The safekeeping, administration and securing of crypto-assets or private cryptographic keys for others. In Germany this has been a financial service requiring a license under the German Banking Act (KWG) since 2020. Under the EU's MiCA regulation, the comparable service is called “providing custody and administration of crypto-assets on behalf of clients” and requires authorization.

Source: BaFin, crypto custody business (2020); BaFin, MiCAR guidance notice (2025)

More: Crypto in institutional portfolios: access, custody, regulation and risk budget

An electronic security under Germany's Electronic Securities Act (eWpG, 2021) that is issued by entry in a crypto securities register instead of by a physical certificate. The register is a tamper-proof recording system, usually a blockchain. Whoever keeps the register needs a license from BaFin, Germany's financial regulator, under the German Banking Act (KWG).

Source: BaFin, crypto securities (2023)

More: Digital assets: tokenization, stablecoins, crypto securities and the digital euro

A digital representation of a value or a right that is transferred and stored using distributed ledger technology such as a blockchain. The EU's MiCA regulation distinguishes e-money tokens, asset-referenced tokens and other crypto-assets such as bitcoin or ether; tokenized financial instruments are not covered.

Source: BaFin, MiCAR (2024)

More: Crypto in institutional portfolios: access, custody, regulation and risk budget

Change in value of a bond or bond portfolio in dollars when the credit spread rises by one basis point. Approximately market value × spread duration × 0.0001; the counterpart of DV01 for the level of interest rates.

Example: $150,000 of corporate bonds with a spread duration of 5: 150,000 × 5 × 0.0001 = $75 per basis point.

More: Scenario analysis and sensitivity analysis: stress testing equity, interest rate, credit and currency risk

Commodity Trading Advisor: under US law, a person or firm that advises on futures trading or manages accounts for a fee; registered with the NFA, to which the regulator, the CFTC, has delegated registration. Most CTAs follow trends systematically across many markets.

Source: NFA (2026)

More: CTAs and managed futures: industry, position sizing, costs and crisis protection

The probability of large price changes falls off like a power with exponent α ≈ 3, not exponentially as in the normal distribution; observed from about 2 to 100 standard deviations. The variance is finite, the kurtosis infinite.

Source: Gopikrishnan et al. (1998); Gabaix et al. (2003)

The sum of the abnormal returns over the days of an event window. Averaged over many events (CAAR), it shows how strongly and how quickly prices react to a particular type of news.

Example: Abnormal returns of +0.4%, +2.1% and −0.3% on three days give a CAR of +2.2%.

Source: MacKinlay (1997)

More: Event studies: how to measure and test price reactions to events

The total change in value over a period, without converting it to an annual figure. 100% in ten years sounds like a lot, but corresponds to just over 7% a year.

More: CAGR: how to calculate the average annual return correctly

The part of an international portfolio's active return that is attributable to exchange rates. Without a separate effect, it remains hidden in allocation or selection; it is split into the interest rate differential and the unexpected exchange rate movement.

Source: Ankrim and Hensel (1994)

More: Performance attribution: Brinson decomposition, factors and linking over time

Contract to exchange a currency on a later date at a rate fixed today, the forward rate. Under covered interest parity, the forward rate is the spot rate adjusted for the interest rate differential; currency hedges and carry trades usually run through such contracts.

Source: Hull (2021)

More: Carry trade: earning interest with currencies and bonds · Methodology: Carry backtest: methodology for FX and bond carry

Eliminating exchange rate fluctuations, usually through currency forwards that are renewed every month. Common for bonds in foreign currencies, disputed for equities.

Source: Campbell et al. (2010); Perold and Schulman (1988)

More: Currency risk: how exchange rates change your return

Fluctuation caused by exchange rates: if the dollar rises against the euro, European equities lose value in dollar terms. What matters is the currency of the securities, not that of the fund.

A share class that hedges the exchange rate risk against the share class currency, e.g. a global ETF in “USD Hedged”. It costs or earns roughly the interest rate differential and usually comes with slightly higher fees.

More: Currency risk: how exchange rates change your return

The distance between the portfolio value and the floor, in dollars or as a percentage of the value. In CPPI, the cushion times the multiplier determines how much is held in equities.

More: CPPI: portfolio insurance with cushion, floor and multiplier · Methodology: CPPI backtest: methodology

Companies whose profits fluctuate strongly with the business cycle, e.g. industrials, materials or carmakers. They rise more than average in an upswing and fall more sharply in recessions.