ADR'sAmerican Depository Receipts are certificates representing ownership of shares of foreign stocks on deposit in a U.S. bank. ADR's can be readily traded in the U.S. without the normal hassle associated with foreign stocks.
ADV Form or ADV-IIThe ADV form is the required SEC registration form required of all investment advisors and consultants. It contains the answers to key questions about a firm's ownership, financial condition, principals and business. The ADV-II is a portion of the registration form that contains vital disclosure information. All advisors and consultants must offer to send part II or an equivalent brochure to their clients annually.
AIMRThe Association of Investment Management and Research is the main professional organization in the United States and Canada for security analysts, portfolio managers, and consultants. It is the successor to the Financial Analysts Federation and the Institute of Chartered Financial Analysts.
absolute returnAbsolute return refers to the rate of return earned without reference to any other standard.
active managementActive management is any investment process that is driven by an interpretive process rather than a mimicking process. Active management may be based upon a disciplined evaluation of fundamental statistics, trends, computer models or any other rational or irrational process. Active management does not necessarily imply the active trading of securities. The decision to hold onto a security in one's portfolio can be considered an action.
actuaryA professional qualified to calculate the required contributions to balance the asset and liability aspects of a pension fund. Enrolled actuaries are allowed to practice law in tax courts.
actuarial assumptionsA group of reasonable assumptions about future inflation, rates of return, salary growth, probable death rates and probable disability. As a whole these form a basis for the actuary to predict (estimate) the liability of the fund year by year in the future.
alphaAlpha is the risk adjusted rate of return. It measures the rate of return earned after a market return adjusted by the risk level of the portfolio is subtracted. Mathematically, alpha is the 'y' intercept calculated using a linear regression of a series of rates of return.
amortizationThe process of spreading a gain or loss smoothly over a period of time. Usually, the gain or loss is divided into equal annual parts and a portion recorded each year.
amortizationThe process of spreading a gain or loss smoothly over a period of time. Usually, the gain or loss is divided into equal annual parts and a portion recorded each year.
annualized rate of returnThe annualized rate of return is the average (technically geometric average) return that if earned over the period covered would produce the same total compound rate of return that the actual set of fluctuating returns produced.
arbitrageArbitrage is the process of purchasing a security and simultaneously selling a like (or identical) security short in order to capture the difference in price which may exist because of a short term discrepancy in the pricing of one or the other. In its purest sense, this is a riskless transaction.
As an example, one could buy shares in General Motors in New York for $44 and sell shares at the same time in Tokyo for $44.125. In doing so, the arbitrageur would pocket the 12-1/2 cents per share.
arbitrageurOne who engages in arbitrage activities.
BICBank Investment Contract is an instrument created by a bank to mimic the performance of a GIC (issued by an insurance company). As such, it carries a stated rate of return and is always quoted at book value.
balanced managementBalanced management incorporates the use of two classes of assets -- stocks, bonds -- and cash equivalents. Balanced managers adjust the mix of the components to meet client needs, to account for risk tolerance and/or to time the market.
basic industriesBasic industry stocks include such issues as mining, heavy manufacturing, and chemicals.
bear marketA bear market is a sustained period during which the prices for most common stocks is falling.
betaBeta is a measure of relative risk for a stock portfolio. It relates the size of a portfolio's swings to those of the S&P 500. If the value is greater than 1.00, then the portfolio amplifies market movements. If it is less than 1.00 then it dampens the movements. Mathematically, beta is the slope of the regression line between the S&P 500 (less the risk free rate) and the portfolio (less the risk free rate).
BloombergThe Bloomberg(r) or Bloomberg machine is a computer terminal attached to a time sharing system containing information on bonds. The computer database contains historical and real time data on corporate and government bond activity. There are also programs for performing yield curve, duration and spread analyses.
blue sky lawsBlue sky laws refer to the individual state by state registration requirements for investment firms and investment vehicles, such as mutual funds.
bondsBonds are contracts between the issuer and the holder (owner) under which the issuer promises to pay the holder a regular sum of interest on a schedule of dates (coupons) and to repay the principle on a specified date. Bonds may also include other clauses which complicate the contract, such as call or put provisions and conversion options.
book valueBook value as related to a tax exempt fund is the carrying figure used for accounting purposes. It is usually, but not always, the original purchase price of an asset. Some states still mandate the use of book value accounting for state and municipal pension funds.
bottom up investment styleBottom up investing seeks to identify individual stocks for purchase without regard to economic forecasts or industry weightings. Each stock is chosen or eliminated based upon its own merit.
bull marketA bull market is a sustained period during which the prices for most common stocks are rising.
bullet contractA bullet contract is a kind of guaranteed income contract. The bullet refers to the fact that money is deposited in the account on one single date and refunded on another single date.
CAPMThe Capital Asset Pricing Model is an economic model for relating the prices among different asset classes by addressing the risk reward relationship between investments. It was developed by Dr. Wm. Sharp at Stanford in the 1960's. Dr. Sharp was awarded the Nobel Prize in 1991 for his work on CAPM.
CMOCMO's are Collateralized Mortgage Obligations. These instruments are created by packaging various pools of mortgages (usually government guaranteed GNMA's) and then selling off various interests in the package. CMO's are desirable if one wishes to match a given cash flow structure that is not readily available.
cafeteria planA cafeteria plan is a type of employee benefit program that allows each employee to customize his/her own package of benefits. The employee can use a payroll deduction plan to "purchase" pretax benefits, including vacation, health care and dependent care expenses.
call optionsCall options are contracts that give the purchaser the right to buy from the contract seller a given number of shares of stock at a predetermined price on or before a predetermined date.
call provisionsCall provisions provide a means for bonds issuers to redeem their bonds before maturity if interest rates fall significantly. These clauses in the contract are designed to limit the bond issuers obligations to pay well above market rates of interest for long periods of time. Call provisions are always a negative from the point of view of an investor.
cars and cardsCars and cards is a jargon term referring to short or intermediate term bonds Issued by credit card or automobile finance companies. The bonds are paid off as consumers pay off their debts.
cap rateThe Cap rate (capitalization rate) is the percentage return used to value real estate holdings. The value of the property is equal to the net income divided by the cap rate (in decimal form). For example, if the cap rate is 10% (or 0.10) and the building produces a net income of $1,000,000, then the building is "worth" $1,000,000/0.10 or $10,000,000.
capitalizationCapitalization is the total dollar value of the outstanding common stock in a company. It is found by multiplying the number of shares issued by the current market price for those shares.
chaos theoryChaos theory is a mathematical discipline which seeks to explain very complicated patterns of behavior. Central to this theory is that there is an underlying simple repeating pattern. Once that pattern is identified, complicated patterns can be built up by continuously employing the simple pattern. Also as a consequence of chaos theory, every possible outcome, no matter how outlandish, will occur at some point.
churningChurning is the excessive unnecessary trading of securities. The term is commonly used in connection with high levels of stock transactions which create brokerage commissions without benefit to the client.
collarThe term collar refers to any of several kinds of transactions where the participant trades potential large positive returns for protection against losses or a below desired level of return.
As an example, a collar can be put on a bond portfolio's return by agreeing to turn over all of the capital gains earned above a certain threshold to another individual in exchange for that individual's agreement to make up all capital losses suffered. In doing so, the bond holder caps his rate of return while limiting his losses. There is always a cost to putting on a collar.
commingled fund (trust)A commingled fund or commingled trust is a legal entity set up to provide a means for similar investors to pool their assets to purchase securities or physical assets, such as real estate. The participants in the fund benefit from the greater purchasing power and economies of scale of the aggregate fund.
common stockCommon stock refers to an instrument that represents ownership in a corporation and a right to a share of the profits. Usually it conveys voting rights at annual meetings as well.
consumer goods stocksConsumer goods companies are those that primarily manufacture items for use by the general public. These companies include manufacturers of clothing, appliances, food and drugs.
consumer servicesConsumer services companies are those that primarily distribute goods and provide services to the general public. These include retail stores, restaurants and hotels.
contrarianA contrarian investor is one who purchases securities or whole classes of assets based primarily upon the magnitude of the negative sentiment against such a purchase. That is, a contrarian seeks to buy assets at "bargain basement" prices when everyone else is selling.
convertible arbitrageConvertible arbitrage is a strategy whereby the manager purchases a convertible bond while simultaneously short selling the stock of the same company. The objective is to capture any mispricing of one or the other security. Convertible arbitrage differs from pure arbitrage in that the convertible bond is subject to interest rate risks in addition to the price movement of the stock.
convertible bondsConvertible bonds are lower grade corporate bonds that give the holder the option of exchanging the bonds at any time for a specified number of shares of stock. Convertible bonds therefore have characteristics of both stocks and bonds. As the price of the associated stock (underlying issue) rises the convertible behaves more like the stock. When the price of the stock is low, the convertible behaves more like a bond.
convertible preferred stockConvertible preferred stock is a preferred stock that can be converted into a share or shares of common stock at a predetermined ratio.
core portfolioA core portfolio is a highly diversified "plain vanilla", neutral risk portfolio of securities. It is designed to capture the risk/return characteristics of the broad market. The core portfolio may be actively or passively managed.
corner portfolioA corner portfolio is a highly diversified portfolio of highly aggressive stocks. It is constructed by starting with the most aggressive stock available. Additional, slightly less aggressive stocks are added one after the other until the next stock added does not produce an acceptable increment in terms of a risk/reward ratio.
corporate governanceCorporate governance refers to any of the by-laws or other board level actions which control the way a corporation conducts its business. Corporate governance issues address such things as voting rights of shareholders, corporate policy toward executive compensation, or moral issues such as investment in South Africa and "sin" issues.
correlationCorrelation is the measure of how closely two series of numbers, events, patterns of returns, etc. move together. If the two patterns move together perfectly, then the correlation is 1.00. If they move completely independently, then the correlation is 0.00.
cumulative rate of returnThe cumulative rate of return is the effective rate of return achieved over an extended period of time. It is found by linking together the rates of return of several short periods of time.
Example:
rate of return year 1: 10.1%
rate of return year 2: 8.2%
rate of return year 3: 11.2%
Formula:
(1+rate 1) x (1+rate 2) x (1+rate 3) = (1 + cumulative rate of return)
(1+ .101) x (1+ .082) x (1+ .112) = (1 + .325)
Therefore, cumulative return for all three years is 32.5%.
custodianThe custodian is the guardian or keeper of the assets, usually stocks and bonds. The custodian is normally a bank or brokerage house. The duties of custodian are to safeguard the securities, effect the actual purchases and sales, collect dividends and coupons, and place uninvested funds into a money market account (optional).
DTCThe Depository Trust Company is a central clearing house for the transfer of securities. DTC transfers allow for the electronic transfer of ownership, thereby eliminating much of the paper flow. Most major banks and brokerage firms are members of the DTC. It is located in New York City.
dealerA dealer is a securities firm that buys and sells securities from its inventory. A dealer is distinct from a broker in that the broker does not maintain an inventory.
decileDecile is a statistical term. It refers to the breaking apart of a distribution of results into ten equal parts or groups of observations. Each part is referred to as a decile.
depressionA depression is an economic condition caused by systemic economic problems in a country which cannot be elevated by monetary policy. That is, no amount of monetary easing can reverse economic shrinkage. Depressions may respond to fiscal policy changes. (Keynesian economics)
dispersion of returnsDispersion of returns measures the range of returns that an individual manager (or firm) achieves for its various clients. If the dispersion is very low, then all accounts are probably being managed the same way and it is likely that a stated style is being used. If the dispersion is very high, then there is less confidence in the manager's adherence to his style or that different managers within the same firm are managing money in diverse ways.
dividendA dividend is a cash or stock distribution paid to holders of shares of common stock. The payment of dividends is not required. The board of directors has to declare a dividend.
dividend discount modelDividend discount models are tools used by value managers to establish a theoretical value on stocks. The theory is based upon the premise that a stock is simply a right to collect dividends from the company. The model anticipates the future dividends that can be expected from a given company and then discounts each dividend by a factor relating to the time until the dividend is due. By comparing the theoretical value to the current price, the manager can establish whether the stock is "cheap" or "pricey".
diversificationDiversification is the process of spreading assets among a large number of investments to minimize the portfolio's exposure to unusually bad performance effecting any one element of the portfolio. Diversification can refer to asset classes or to securities within any one asset class.
dollar roll programDollar roll programs involve buying mortgage backed bonds on a future delivery basis and then selling the delivery contract prior to the delivery date. The proceeds from that sale are used to purchase another contract for a later date. The process can be considered to create a synthetic futures contract.
dollar weighted rate of returnThe dollar weighted rate of return is also known as the internal rate of return. It is that figure which equates the beginning value and the cash flows during a period with the ending value. The dollar weighted rate of return calculation produces a figure which is dependent upon the size of the investment at different points of time. The period during which the largest amount of assets are employed is weighted most heavily.
dollar cost averagingDollar cost averaging is a simple strategy which allows an investor to capture some benefit from the fluctuations of prices within the securities markets. The strategy involves periodically purchasing the exact same dollar amount of a security. When prices are high, the number of units purchased will be small. When prices are low, the number of units purchased will be large. Over time the effective average purchase price for the total number of units purchased will be less than the arithmetic average price of the security during that period. The wider the fluctuations in securities prices, the larger the advantage to employing this strategy.
Dow Jones Industrials
or Dow or DJIIThe Dow Jones is a price movement index which measures the combined price changes of a group of 30 of the largest industrial companies such as IBM and General Electric. It has limited value because it tracks only a very small segment of the market and does not include dividends.
or Dow or DJIIThe Dow Jones is a price movement index which measures the combined price changes of a group of 30 of the largest industrial companies such as IBM and General Electric. It has limited value because it tracks only a very small segment of the market and does not include dividends.
dot.comDot.com is shorthand for an internet related company.
durable goodsDurable goods are those products with useful lives in excess of three years. The list includes major household appliances and automobiles.
durationDuration is a measure of the sensitivity of a bond (or portfolio of bonds) to interest rate changes. As an example, if the duration of a bond is 5.1, then for every 1% rise in general interest rates, the bond will decline in value by 5.1 x 1% or 5.1%. Conversely, if interest rates drop by 1% then the bond will increase in value by 5.1%. Another way to describe duration, is that it is the time it takes to get 1/2 of your money back (on a discounted basis).
earnings per shareEarnings per share is the simple division of the net corporate earnings figure divided by the number of outstanding shares. (See fully diluted earnings per share.)
earnings yieldEarnings yield is the earnings per share divided by the stock price. It is the inverse of the price/earning ratio. The term earnings yield is principally used in the UK and therefore is commonly used in evaluating foreign equities.
emerging marketsEmerging markets refers to the stock markets in countries whose economies are relatively small, but have the potential to grow rapidly during the 21st Century. Emerging markets are usually in third world countries
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equitiesEquities are investments that represent ownership of a corporation or real piece of property.
ERISAERISA, or the Employees Retirement Income Security Act, is the basic law regulating pension funds and other employee benefits. It sets forth the obligations of the sponsor, trustees and other fiduciaries.
Fed funds rateThe Fed funds rate is the rate of interest that the Federal Reserve charges banks for overnight loans.
fiduciaryA fiduciary is a person or organization employed to act or acting in a position of trust with respect to a legally created fund. Fiduciaries are required to act in a "responsible" fashion. Certain fiduciary responsibilities are related to the "prudent man" rule, others are set forth in state or local laws.
fiscal policyFiscal policy is the economic policy of the federal government as it applies to spending and taxation. Federal policy is said to be expansionary if expenses exceed tax revenues.
fully diluted earnings per share
Fully diluted earnings per share is calculated by dividing the net total corporate earnings by the sum of the total outstanding shares and the number of shares which would exist if all stock options and warrants were exercised.
Fully diluted earnings per share is calculated by dividing the net total corporate earnings by the sum of the total outstanding shares and the number of shares which would exist if all stock options and warrants were exercised.
fund of fundsA fund of funds is a commingled trust that engages the services of a number of advisors. The manager of the commingled trust has the sole authority to engage new managers and/or terminate current ones.
fundamental analysisFundamental analysis is the study of stocks and bonds through the examination of the accounting data. Fundamental analysis relies heavily on ratios, historical trends and uniform comparisons among other company data. (See technical analysis.)
futures contractsFutures contracts are legally binding agreements between two parties for the transfer of a given property on a given date for a set price. Futures contracts can be traded on commodity markets for a variety of standard physical goods such as wheat or coal and for financial instruments such as government bonds or packages of stocks.
Investment advisors use futures contracts (both by selling contracts and purchasing them) to hedge against market movements or to capture market movements.
GARPGARP is the acronym for Growth At A Reasonable Price, which is a conservative active growth stock strategy. A GARP manager seeks to temper his decision to purchase stocks with above average growth rates based upon valuation techniques borrowed from value management.
GICGuaranteed Income Contracts or Guaranteed Insurance Contracts are private corporate bonds issued by insurance companies. These instruments usually carry a fixed term and target interest rate although other variations do exist. The "guarantee" refers to the stated minimum rate of return to be credited to the holder, not to any federal or other guarantee as to the repayment of principal. The advantage of owning GIC's is based upon favorable accounting treatment. Under current accounting rules these contracts can be carried at face value regardless of interest rate fluctuations.
GDPGross Domestic Product is the sum total of the value of goods and services produced within a country. It is the best measure of the size of a countries economic activity.
GNMAGNMA (pronounced ginnie may) is the acronym for Government National Mortgage Association. GNMA's are bonds issued to purchase groups or pools of government guaranteed residential mortgages. The holder receives monthly payments of interest and principal.
GNPGross National Product is the sum total of the value of goods and services produced in a country including any transfers to or from other countries.
global equity managementGlobal equity managers buy stock listed on any exchange in the world including the U.S.. This is in contrast to international managers who purchase stocks anywhere except the U.S..
global managementGlobal management involves investing in all of the available capital markets including the U.S.. Global management differs from international management in that the latter excludes U.S. securities.
gross of feesGross of fees usually refers to the rate of return reported by a manager before subtracting his management fees, but after accounting for brokerage fees. The term net of fees is used when management fees have been subtracted.
growth rateThe term growth rate is used in two contexts. The first usage applies to the rate of return assumed by the actuary for the investment assets. The second usage is for the rate of increase of the earnings per share reported by an individual company.
growth stockGrowth stocks are those whose earnings per share or sales per share are increasing at a pace significantly faster than the rate reported for the typical stock. Usually these companies are involved in rapidly expanding industries such as cellular telephones or genetic engineering, although sometimes they are rapidly expanding competitors in mature markets such as Wal-Mart or Home Depot.
growth stock managementGrowth stock management is an equity style which concentrates on the securities of companies whose earnings are growing significantly faster than the economy as a whole. Growth stock management is usually more volatile than core or value management.
G-7 CountriesThe G-7 Countries are seven of the largest economic powers. The finance ministers get together from time to time and may in concert set global financial policies. The seven are: the United States, Great Britain, France, Germany, Japan, Italy, and Canada.
hedge fundA hedge fund is a portfolio containing both long positions in common stocks and short positions in different common stocks. The goal of a hedge fund is to earn a stable positive rate of return regardless of the direction of the stock market. Investors in hedge funds are willing to forego some of the upside potential in the market to avoid large losses. The theory is that if the stock market goes down, the profits in the short positions will offset the losses in the long positions. On the other hand should the market rise, losses in the short positions will dampen the rate of return for the portfolio.
IO's and PO'sIO's and PO's are types of collateralized mortgage obligations. IO stands for interest only and PO for principle only. These instruments are constructed by segregating the interest payments received from the mortgages from the principle repayments. Each component is sold separately to different investors at different yields.
IPOIPO is the acronym for Initial Public Offering. IPO refers to the issue of common stock, which may either be a completely new stock or the reissuing of stock in a privately held company.
IRAAn Individual Retirement Account is a tax deferred portable pension account. IRA contributions are currently not taxable in the current year for employees not covered by another pension fund by their current employer. Earnings on invested assets are not taxable until removed from the plan for all employees. Employers are not involved in IRA's from a fiduciary point of view.
immunizationImmunization is the process of balancing a portfolio of assets against a given set of liabilities through matching the duration of the assets to the duration of the liabilities.
in kind transfersIn kind transfers occur when securities (or physical assets) rather than cash change hands.
indentureThe indenture is the language of the legal contract that constitutes a bond. It sets forth the conditions for payment of coupons and principle as well as establishes sinking funds, refunding provisions, and call or put provisions.
index fundIndex funds are passive investment programs that seek to mimic the performance of published stock or bond indexes.
interest rate anticipatorAn interest rate anticipator is an active bond manager whose primary goal is to predict the direction of interest rates. Interest rate anticipators are market timers within the bond market.
internal rate of returnThe internal rate of return is the average rate of return which equates the beginning value and the cash flows during a period with the ending value. (See dollar weighted rate of return.)
interest rate anticipatorAn interest rate anticipator is an active bond manager whose primary goal is to predict the direction of interest rates. Interest rate anticipators are market timers within the bond market.
internal rate of returnThe internal rate of return is the average rate of return which equates the beginning value and the cash flows during a period with the ending value. (See dollar weighted rate of return.)
international equitiesInternational equities are shares of companies incorporated anywhere except the U.S.. With few exceptions, the shares in these stocks must be purchased and custodied outside of the U.S.
International Foundation for Employee Benefits
The International Foundation is an educational organization designed to assist trustees and administrators of jointly trusteed (union) and public funds.
The International Foundation is an educational organization designed to assist trustees and administrators of jointly trusteed (union) and public funds.
investment advisorAny firm involved directly or indirectly in the purchase or sale of securities on behalf of a paying client.
investment companyA firm that issues mutual funds. Investment companies are regulated by the SEC under the Investment Company Act of 1940.
large cap stockLarge cap stocks are those with market capitalizations in excess of $5 billion, where market capitalization is calculated by multiplying the number of shares outstanding by the price of the stock.
leveraged buy-out or LBOLeveraged buy out is a financial transaction where an individual or group of investors borrows heavily to purchase a company from the stockholders. The money to finance the transaction is raised by obtaining relatively expensive loans from banks and/or by issuing below investment grade (junk) bonds.
limited partnershipLimited partnerships are ownership structures whereby two classes of ownership are established -- general partners and limited partners. The general partners are involved in the daily operation of the firm and assume all of the liability associated with ownership. The limited partners are passive investors whose liability is limited to the amount invested. If the business is successful, the general partners usually get a large reward for assuming the risk. A key restriction on limited partnerships is that there is statutory limit of a maximum 99 limited partners.
liquid assetsLiquid assets are defined as those items which can be converted to cash quickly and cash itself. Included in this class are stocks, bonds, certificates of deposit and commercial paper.
liquidityLiquidity is the ease with which an asset can be converted into cash.
linear regressionLinear regression is a mathematical technique whereby the relationship between two sets of data is found.
mark to marketMarking an asset to market involves adjusting the value at which an asset is carried on a fund's books to reflect changes in the actual value over time. The market price is the price which could actually be received if the asset were sold immediately.
market cycleA market cycle is the period of time during which the pattern of stock prices rises and falls. The common rule of thumb is that a market cycle takes 4 to 5 years.
market neutral strategyA market neutral strategy is a type of hedge fund. In this approach the manager buys stock that he believes will outperform similar stocks in their industry. At the same time he sells the same amount of stocks in those companies that he believes will do less well than others in their industry. If the manager is correct the fund return will be equal to the difference between the performance of the two groups of stocks, regardless of the overall movement of the market.
market timerA market timer is an investment manager who attempts to capitalize on fluctuations in the market by moving from one asset category to another, hopefully in advance of a dramatic shift in the returns in one or the other asset class.
medianThe median is the return (or observation) at the half way point of the range of returns (or observations). That is, exactly half of the returns (or observations) are less than the median value and half are greater than the median value. The median is often confused with the mean, which is the arithmetic average of the returns (or observations).
meanThe mean is the arithmetic average of a range of figures.
mid cap stocksMid cap stocks are often defined as those with capitalizations between $500 million and $5 billion.
modeIn a group of returns or observations, the mode is the most commonly occurring value.
monetary policyMonetary policy is the action of the federal government to increase or decrease the amount of money in circulation. Monetary policy is effected primarily through the action of the Federal Reserve Board.
mortgage pass throughsMortgage pass throughs are bonds created by packaging a large number of mortgages (usually on people's homes). The holder of the bond receives the interest and any principal repayments, hence the cash flow from the individual mortgages "passes through" the bond structure.
mutual fundA mutual fund is a collective investment trust organized under the Investment Company Act of 1940. Mutual funds may be purchased by any investor, taxable or tax exempt provided that a full disclosure has been provided.
NASDAQThe National Association of Securities Dealers Automated Quotation system is an on line network of securities dealers who trade stocks via computer terminal and telephone rather than at a physical stock exchange. NASDAQ stocks are usually smaller corporate issues and bank stocks.
naked optionsNaked options refers to the purchase or sale of put or call options when the individual involved in the transaction does not own the underlying stock.
nontraditional investmentsThe term non traditional investments is a fuzzy term used to describe any investment not usually held in an institutional portfolio. Historically, it meant everything except domestic stocks bonds and cash equivalents.
normal portfolioA normal portfolio is a custom passive index used to separate a manager's value added from the performance of his individual segment of the market. As an example, a mid-cap growth manager's normal portfolio might be an equal weighted index of all of the mid-cap common stocks with growth rates in excess of a specified threshold.
PAC'sPreferred Amortization Contracts are a class of Collateralized Mortgage Obligations (CMO's) that are designed to provide a smooth cash flow and avoid prepayment risk. They are created by establishing rules as to how prepayments of mortgages are allocated among different investors.
PIK'sPIK's are bonds that do not pay cash coupons, but rather issue additional bonds to the bond holder. PIK's (Pay In Kinds) are normally below investment grade (junk) bonds used to finance transactions. They are issued when there is not sufficient cash flows to meet regular payment schedules.
PBGCThe Pension Benefit Guarantee Corporation is a federal government agency created to insure benefits to participants in the event of a bankruptcy by the plan sponsor.
passive managementPassive management refers to the investment of assets in order to mimic an externally defined pattern. That is, the purchase and sale decisions are based upon decisions made by others such as index creators like S&P.
peer group comparisonPeer group comparisons usually refer to sub-universes created by selecting specific manager types segregated by style, such as value or growth, or by specific sponsor types, such as endowment funds or public pension funds.
penny stocksPenny stocks are highly volatile, low priced, thinly traded securities. They are usuallyhighly speculative investments and rarely fit into institutional portfolios.
percentilePercentile is a statistical term. It refers to the breaking apart of a distribution of results into one hundred equal parts or groups of observations. Each part is referred to as a percentile.
portfolio insurancePortfolio insurance is a computer driven technique using options and futures to protect a portfolio against any drop in price. As with regular insurance, there is a significant cost in terms of return to utilizing portfolio insurance.
preferred stockPreferred stock is a senior security that pays a regular predetermined rate of interest before the common stock pays a dividend. Preferred stock is in effect a hybrid between common stock and a bond that never matures. Preferred stockholders may or may not have voting rights.
prepayment riskPrepayment risk is a risk associated with mortgage pass through bonds arising when individual homeowners refinance their mortgages in order to take advantage of lower interest rates. The holders of these bonds receive the principle immediately and find that they no longer can earn the relatively high interest rates that they expected when the bought the bonds.
price/earnings ratioThe Price/Earnings ratio is one of the common measures of a common stock's value. It indicates how many years it would take for the company to earn an amount of money equal to the firm's current capitalization (excluding growth).
price to book ratioPrice to book is a measure of the value of the company in an accounting sense relative to the price of the stock. It is simply the division of the price of the stock divided by the book value per share shown on the companies balance sheet. The book value of a company from an accounting point of view represents the value of the physical assets adjusted for depreciation less the debts owed against those assets.
prime rateThe prime rate is the rate of interest banks charge their best clients for borrowing money.
private placementsPrivate placements are bonds issued by companies that are not registered with the SEC. These bonds cannot be publicly traded. Therefore, they pay a small premium to the holder because of the reduced liquidity. (The issuer saved money on registration costs.)
program tradingProgram trading or computer trading is a formula driven process where different signals cause stock trades to be initiated. Because these trades are all begun at once, program trading generates bursts of activity in the market and can exert great pressure on prices. If several programs "kick in" at the same time stock prices can move very rapidly and an orderly market trading environment may cease to exist.
proxyA proxy is a legal limited power of attorney giving a trustee the right to vote a shareholder's interest in a company at the annual board of directors meeting.
proxy battleA proxy battle occurs when two parties with opposing views attempt to gather more votes from stockholders than the other party can gather.
proxy votingProxy voting is the process of gathering up the proxies of various stock holders and using their rights at the corporate annual meeting.
prudent man ruleThe prudent man rule is based upon a nineteenth century legal ruling. It states that a fiduciary in executing his duty will be judged in the context of what other reasonable (prudent) people in the same circumstances have done (or would do).
put optionA put option is a contract whereby the purchaser of the contract has a legal right to demand that the issuer (seller) of the contract buy the purchaser's stock in a specified company on a specified date for a predetermined price. Put options are purchased by investment advisors to limit the risk of declining stock prices. In essence, "insurance" is purchased against potential losses.
quartileQuartile is a statistical term. It refers to the breaking apart of a distribution of results into four equal parts or groups of observations. Each part is referred to as a quartile.
quintileQuintile is a statistical term. It refers to the breaking apart of a distribution of results into five equal parts or groups of observations. Each part is referred to as a quintile.
r-squaredThe r-squared statistic measures the degree to which a collection of observations is explained by a line drawn through the middle of the points. In equity portfolio analysis, the r-squared is used as a measure of the level of diversification of a portfolio. An r-squared between .95 and 1.00 indicates a highly diversified portfolio. An r-squared between .90 and .95 indicates a reasonably well diversified portfolio. An r-squared between .80 and .90 is not well diversified. An r-squared less than .80 indicates a highly undiversified portfolio.
real rate of returnThe real rate of return is the rate of return in excess of the inflation rate.
recessionA recession is an economic period when the total amount of goods and services produced during a given period is less that the amount produced during a previous period. Recessions are usually marked by rising unemployment, falling demand for goods and declining interest rates. A recession differs from a depression in that recessions respond to monetary stimulation and depressions do not.
rebalancingRebalancing is the process of resetting the asset allocation of a balanced portfolio to a predetermined level. For example if a 50/50 equity bond allocation was initially chosen and over time the mix had shifted to 55/45. The portfolio would be rebalanced by selling off just under one tenth of the stocks and using the proceeds to purchase bonds.
REITREIT (pronounced reet) is the acronym for Real Estate Investment Trust. REIT's are trusts which are created to own real estate properties and then are registered as securities so that ownership can be traded easily. The shares in these trusts are sold on stock exchanges as though they were common stock shares.
relative returnRelative return refers to the difference between a manager's or fund's return and a benchmark index.
REPOREPO is the jargon term referring to a repurchase agreement transaction.
repurchase agreementA repurchase agreement is a type of cash equivalent transaction. Under this type of contract, the investor or lender takes title to a long bond which the borrower agrees to buy back in a day or a few days at a predetermined price, which represents repayment of the principle plus interest. Therefore, the investor has a bond as collateral without any market price risk.
restricted stockRestricted stock consists of shares given to insiders at the time a stock goes public (or later upon a board action) but which cannot be registered for sale to the general public for a period of time, usually two years, to prevent any fraudulent manipulation of the price of a new stock.
reversion to the meanReversion to the mean is a theory that there exists some underlying central "correct" valuation for securities prices. From time to time prices will depart from that value, but ultimately most drift back to that central or mean level. There is no statistical evidence to support the existence of such an effect.
riskRisk is the possibility or probability of not achieving a required rate of return.
small cap stocksSmall capitalization stocks are often defined as stocks in corporations with total capitalization (price of the stock times the number of outstanding shares) of less than $500 million.
specialistA specialist is a person who acts as a dealer on the floor of the New York stock exchange and is charged with continuously buying and selling shares in a few (or only one) issues. The specialist matches up buyers and sellers where possible and uses his own capital or line of credit to buy stocks when there are no buyers. In doing so the specialist is charged with maintaining an orderly liquid market.
spot rateThe spot rate is the segment yield that is implied by the yield curve at a given "spot" on the curve. For example, the spot rate out 8 years is the implied rate of return that a 10 year bond will earn between year 8 and year 9. The yield to maturity can be thought of as an average of all of the spot rates during a bond's life.
standard deviationStandard deviation is a statistical term referring to the probable spread of observations around the average or expected value. In financial contexts standard deviation is used as measure of risk. That is, as the standard deviation increases, the confidence one has in being able to predict the outcome decreases. A drop in one's confidence usually is considered to equate with risk.
stratified samplingStratified sampling is a technique for matching the return characteristics of an index made up of a large number of issues without having to hold all of the issues. Under this technique, the index is divided up into a number of cells (e.g., industry groups or sizes of companies). The manager then selects a portfolio making sure that his portfolio has at least a few stocks in each cell.
stock brokerA stock broker is an individual or firm registered with the SEC to effect the transfer of registered securities. A broker may act as agent for the seller, buyer, or both. The broker does not use his own assets in the process, in contrast to a dealer, who does.
subordinated debtSubordinated debt are bonds whose place in a bankruptcy is behind that of another class of bonds.
surplus managementSurplus management is a strategy employed to attempt to keep the value of a fund's assets above the level of fund's the liabilities. The purpose of surplus management is hold down or eliminate any required contributions.
tactical asset allocationTactical asset allocation is a computer model driven market timing technique.
technical analysisTechnical analysis is the process of finding patterns in the past history of stock prices. By identifying commonly occurring patterns, technical analyst attempt to predict future price movements.
T-billA t-bill is a note issued by the U.S. treasury. Bills are distinguished from bonds in that no interest is paid on the notes, but they are sold at a discount to the face amount and retire at the face amount. The difference in the price paid and the face amount is the implied interest. Usually, when one refers to t-bills, it is assumed that the notes that mature in 13 weeks or 91 days from date of issue are what is meant.
time weighted rate of returnThe time weighted rate of return is the return that would be earned on a one dollar of investment. The time weighted rate of return eliminates the effects of contributions to or withdrawals from the fund which are beyond the manager's control.
top down investment styleTop down investing is a style which begins with an economic forecast. Based upon that forecast favored industry sectors are highlighted. Finally, individual stocks are selected within the industry sector. (See bottom up investment style for comparison.)
trancheTranche is the French word for slice. The term is used to describe various pieces of a CMO. CMO's are packages of mortgage pass through pools that are redivided or "sliced up" so that investors can purchase early payments or later payments from the mortgages.
turnoverTurnover is the sale of an asset to purchase another of a similar type. That is, turnover occurs when a manager sells a share of stock in order to purchase another share of stock. Turnover does not occur if a manager sells an asset without purchasing another, nor does it occur when a manager invests a new contribution. A simple operational definition is that turnover is the lesser of purchases or sales.
value at riskValue at risk is a technique for stress testing portfolios. That is, calculations are performed to determine how sensitive the portfolio is to market corrections.
value managementValue management refers to an equity style of investing that places an emphasis on buying stocks when they are relatively cheap. As an example, a common form of value management focuses on purchasing stock selling at a low price to earnings ratio.
VEBAVEBA, or voluntary employee benefits association, is an investment program similar in structure to a 401(k) plan that allows employees to set aside pretax dollars for health related uses after retirement.
window contractA window contract is a type of guaranteed income contract. Under the window provision, money will be accepted for investment at any time within a specified "window" of time. Usually, the window period is one year.
yieldThe yield of a bond is the amount paid as the annual coupon divided by the price. The yield of a stock is the annual dividend divided by the price.
yield curveThe yield curve is a graph showing the relationship between the time to maturity and the yield of a bond with that maturity.
yield to callThe yield to call is the rate of return that would be earned if the bond is called (taken back) at the earliest possible date.
yield to maturityThe yield to maturity is the rate of return that would be earned if a bond is held until the last day indicated on the bond's face.
zero coupon bondsZero coupon bonds are instruments that are issued at a discount and mature at face value. The difference between the initial price and the value at maturity is an imputed interest cost. Zero coupon bonds are highly sensitive to changes in interest rates.
401-K PlanA 401-K plan is a pretax or tax deferred employee savings plan. Employees are permitted to deposit an amount of their income into the program for retirement purposes. The assets are then invested on a tax deferred basis. Only when the assets are withdrawn are they subject to income taxes (and possible penalties for early withdrawal).
403-B PlanA 403-B plan is a tax deferred annuity plan available only employees of non profit corporations and institutions. It is similar to a 401-K plan, but there are significant differences. Under this plan structure employees can make contributions to a program administered by an insurance company or mutual fund company on an individual basis. Each employee has an individual contract with the plan provider as opposed to a 401-K plan where there is a single contract with the provider for all employees. The 403-B plan employer acts only as a conduit for payroll deductions.
404-C regulations404-C regulations discuss the possible options and required conditions for a plan sponsor to transfer the responsibility for asset allocation to the plan participant. 404-C regulations discuss the minimum number and types of investment options which must be offered.
5500 formThe 5500 form is the basic IRS filing document for employee benefit accounts. It is analogous to the 1040 form that individuals file for personal income tax. There are several versions of the form depending upon whether it is an initial filing, annual filing or termination filing.