What is Moral Hazard? Moral hazard refers to the situation that arises when an individual has the chance to take advantage of a financial deal or situation, knowing that all the risks and fallout will land on another party. It means that one party is open to the option – and therefore the temptation –…
What is Fiduciary Duty? Fiduciary duty is the responsibility that fiduciaries are tasked with when dealing with other parties, specifically in relation to financial matters. In most cases, it means that the duties involve a fiduciary overseeing the wealth of their clients, acting on the client’s behalf, and in their best interests. What is a…
What is the Empirical Rule? In mathematics, the empirical rule says that, in a normal data set, virtually every piece of data will fall within three standard deviations of the mean. The mean is the average of all of the numbers within the set. The empirical rule is also referred to as the Three Sigma…
What is the Coefficient of Variation? The coefficient of variation (relative standard deviation) is a statistical measure of the dispersion of data points around the mean. The metric is commonly used to compare the data dispersion between distinct series of data. Unlike the standard deviation that must always be considered in the context of the…
What is Mode? Mode is the most frequently occurring value in a dataset. Along with mean and median, mode is a statistical measure of central tendency in a dataset. Unlike the other measures of central tendency that are unique to a particular dataset, there may be several modes in a dataset. Corporate Finance Institute reviews…
What is Social Mobility? Social mobility refers to the shift in an individual’s social status from one status to another. The shift can either be higher, lower, inter-generational, or intra-generational, and it cannot necessarily be determined if the change is for good or bad. Origin of the Social Mobility Concept Russian-born American sociologist and political…
What is R-Squared? R-Squared (R² or the coefficient of determination) is a statistical measure in a regression model that determines the proportion of variance in the dependent variable that can be explained by the independent variable. In other words, r-squared shows how well the data fit the regression model (the goodness of fit). Figure 1….
What does Pro Forma Mean? Pro forma is Latin for “as a matter of” or “for the sake of form.” It is used primarily in reference to the presentation of information in a formal way, assuming or forecasting pieces of information that may be unavailable. In most cases, pro forma documentation is used to present…
What is Time Period Bias? Time period bias is a sampling error caused by selecting observations that only cover a certain time period (i.e., a certain set of circumstances or factors). Time period bias may lead to inaccurate results since the conclusions obtained from using a sample suffering from the bias may be uniquely specific…
What is Survivorship Bias? Survivorship bias is a type of sample selection bias that occurs when a data set only considers “surviving” or existing observations and fails to consider observations that already ceased to exist. In finance, an example of survivorship bias is when studies on mutual fund returns only use databases that contain data…
