CFA Level 1 Hub
Review CFA Level 1 formulas, ethics, accounting, fixed income, equity, portfolio, and quantitative finance foundations.
Hub concepts directory
Click any element to see exact definitions, formulas, and real-world examples.
Weighted Average Cost of Capital (WACC)
WACC represents a company's blended cost of capital across all sources, including equity and debt, weighted by their proportion in the capital structure.
Fund Accounting
Fund accounting is a specialized accounting system used by investment funds to track the financial activities and calculate the NAV of investment portfolios.
Distribution Waterfall
A distribution waterfall is the method by which private equity and hedge fund distributions are allocated between limited partners (LPs) and the general partner (GP) in a specific sequence.
Price-to-Earnings Ratio (P/E)
The P/E ratio measures a company's current share price relative to its earnings per share (EPS).
Earnings Per Share (EPS)
EPS is the portion of a company's profit allocated to each outstanding share of common stock, serving as an indicator of profitability.
Price-to-Book Ratio (P/B)
P/B compares a company's market capitalization to its book value, indicating how much investors pay for each dollar of net assets.
Return on Equity (ROE)
ROE measures how effectively a company uses shareholders' equity to generate profits, calculated as Net Income divided by Shareholders' Equity.
Private Equity
Private equity involves investing directly in private companies or taking public companies private, with the goal of improving operations and selling for profit.
Duration
Duration measures the sensitivity of a bond's price to changes in interest rates, expressed in years. It represents the weighted average time until cash flows are received.
Yield to Maturity (YTM)
YTM is the total return anticipated on a bond if held until maturity, expressed as an annual rate. It equates the present value of all future cash flows to the current price.
Credit Spread
Credit spread is the yield difference between a corporate bond and a risk-free benchmark (usually Treasury) of similar maturity, compensating for default risk.
High-Yield Bonds
High-yield or 'junk' bonds are corporate bonds rated below investment grade (BB+ or lower by S&P, Ba1 or lower by Moody's), offering higher yields to compensate for default risk.
Value at Risk (VaR)
VaR estimates the maximum potential loss of a portfolio over a specific time period at a given confidence level (e.g., 'We have 95% confidence losses won't exceed $10M in one day').
Capital Asset Pricing Model (CAPM)
CAPM describes the relationship between systematic risk (beta) and expected return: Expected Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate).
Alpha
Alpha measures excess return generated relative to a benchmark or risk-adjusted expected return — the value added by active management.
Diversification
Diversification is the strategy of combining various investments to reduce unsystematic (idiosyncratic) risk without sacrificing expected returns.
Asset Allocation
Asset allocation is the strategic distribution of investments across asset classes (stocks, bonds, real estate, alternatives) to balance risk and return according to investor goals.
CFA (Chartered Financial Analyst)
The CFA designation is a globally recognized professional credential for investment management professionals, awarded by the CFA Institute.
Cost of Equity
Cost of equity is the return required by equity investors given the risk of owning a company's shares — the opportunity cost of investing elsewhere.
Debt-to-Equity Ratio
D/E compares a company's total liabilities to shareholders' equity, indicating the relative proportion of financing from debt vs. equity.
Current Yield
Current yield is the annual income from a bond (coupon payment) divided by its current market price, ignoring capital gains/losses at maturity.
Convexity
Convexity measures the curvature in the relationship between bond prices and yields, refining duration's linear approximation.
Stress Testing
Stress testing evaluates portfolio or institution resilience under extreme but plausible adverse scenarios — market crashes, rate spikes, or economic shocks.
Correlation
Correlation measures the degree to which two securities move in relation to each other, ranging from -1 (perfect negative) to +1 (perfect positive).
Rebalancing
Rebalancing is the process of realigning portfolio weights back to target allocations by buying and selling assets as market movements cause drift.
Security Market Line (SML)
The SML is a graphical representation of CAPM, plotting expected return against systematic risk (beta), with the line starting at risk-free rate and sloping upward by the market risk premium.
Equity Value
Equity value (or market cap) is the value attributable solely to shareholders: Enterprise Value - Debt + Cash - Minority Interest - Preferred Stock.
Strategic Asset Allocation
Strategic asset allocation (SAA) sets long-term target allocations to asset classes based on investor goals, risk tolerance, and time horizon — the policy portfolio.
Tactical Asset Allocation
Tactical asset allocation (TAA) involves actively deviating from strategic targets to exploit short-term market opportunities or avoid perceived risks.
Modern Portfolio Theory (MPT)
MPT, developed by Harry Markowitz (Nobel 1990), is a mathematical framework for assembling portfolios to maximize expected return for a given risk level.
Efficient Frontier
The efficient frontier is the set of optimal portfolios offering the highest expected return for a defined level of risk — or lowest risk for a given return.
TIPS (Treasury Inflation-Protected Securities)
TIPS are US Treasury bonds whose principal value adjusts with inflation (CPI), providing protection against purchasing power erosion.
Dividend Yield
Dividend yield is a financial ratio showing how much a company pays in dividends annually relative to its stock price: Annual Dividends per Share / Price per Share.
Related tools & models
Evaluate your topic mastery
Ready to prove your understanding? Take our curated concept drill to lock in your score.
Take Evaluation Quiz