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"OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks. The other are July, January, September, April, November, May, March, June, December, August, and February."
—Mark Twain |
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| Alpha |
This statistic measures a portfolio’s return in excess of the market return adjusted for risk. It is a measure of the manager’s contribution to performance with reference to security selection. A positive alpha indicates that a portfolio performed better than expected given its level of risk. |
| Asset Allocation |
The process of determining the optimal allocation of a portfolio among broad asset classes. |
| Basis Point |
One hundredth of a percent (100 Basis Points = 1%). |
| Beta |
Measures the volatility of an investment as compared to the volatility of a benchmark. A beta above 1 is more volatile, while a beta below 1 is less volatile. |
| Cash Sweep Accounts |
A money market fund into which all new contributions, stock dividend income and bond interest income is placed “swept”. |
| Correlation Coefficient |
Correlation measures the degree to which the returns of two investments move in tandem. |
| Economically Targeted Investment |
Investments where the goal is to target a certain economic activity, sector, or area in order to produce corollary benefits in addition to the main objective of earning a competitive risk-adjusted rate of return. |
| ERISA |
The Employee Retirement Income Security Act is a 1974 U.S. law governing the operation of most private pension and benefit plans. The law eased pension eligibility rules, set up the Pension Benefit Guaranty Corporation, and established guidelines for the management of pension funds. |
| Fiduciary |
From the Latin word fiducia, meaning “trust.” Someone who stands in a special relation of trust, confidence and/or legal responsibility. A fiduciary is held to a standard of conduct and trust above that of a stranger or of a casual business person due to his or her superior knowledge and/or training. |
| Investment Steward |
A fiduciary such as a trustee, investment committee member or investment consultant who manages investment decisions. |
| Investment Manager |
A fiduciary who makes investment decisions such as choosing stocks, bonds and mutual funds. |
| Money Markets |
Financial markets where financial assets with a maturity of less than one year are traded. Money market funds also refer to open-end mutual funds that invest in low-risk, highly liquid, short-term securities, and whose net asset value is kept stable at $1 per share. |
| Real Estate Investment Trust (REIT) |
An investment fund whose objective is to invest in real estate-related assets. |
| Residual Risk |
Residual risk is the firm-specific risk of a security that is not related to the movement of the overall market. |
| Risk-Adjusted Return |
The return on an investment adjusted to account for the level of risk. |
| Risk-Free Rate of Return |
The return on 90-day U.S. Treasury Bills. This is used as a proxy for a risk-free investment due to its zero default risk, minimal interest rate risk, and high liquidity. |
| R-squared (R2) |
Reflects the percentage of an investment’s return that can be explained by movements in its benchmark index. |
| Safe Harbor Rules |
A series of guidelines which may limit a fiduciary’s liability. |
| Sharpe Ratio |
A measure of risk-adjusted return. The Sharpe Ratio can be used to compare the relative performance of managers. |
| Socially Responsible Investments (SRI) |
An investment that is undertaken based upon social, rather than purely financial guidelines. See also Economically-Targeted Investment. |
| Standard Deviation |
A statistical measurement of the variation of returns from their historical average. Standard deviation is used as an estimate of risk. |
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This glossary was compiled from the following sources:
Eugene B. Burroughs, CFA, Investment Terminology (Revised Edition), International Foundation of Employee Benefit Plans, Inc., 1993.
John Downes and Jordan Elliot Goodman, Dictionary of Finance and Investment Terms (Third Edition), Barron’s Educational Series, Inc., 1991.
John W. Guy, How to Invest Someone Else’s Money, Irwin Professional Publishing, Burr Ridge, Illinois, 1994.
Donald B. Trone, William R. Allbright, and Philip R. Taylor, The Management of Investment Decisions, Irwin Professional Publishing, Burr Ridge, Illinois, 1995.
Jennison Dryden, Understanding Common Portfolio Statistics, 2006
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