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Glossary of Financial Terms


A measure of a fund's risk-adjusted return. Alpha can be used to directly measure the value added or subtracted by a fund's manager. It is calculated by measuring the difference between a fund's actual returns and its expected performance given its level of market risk as measured by beta. An alpha of 1.0 means the fund produced a return 1% higher per year than its beta would predict. An alpha of -1.0 means the fund produced a return 1% lower per year.


Beta measures the risk of a particular investment relative to the market as a whole (the "market" can be any index or specified benchmark). It describes the sensitivity of the investment to broad market movements. For example, in equities, the stock market is assigned a Beta of 1.0. An investment which has a Beta of 0.5 will tend to participate in broad market movements but only as much as the overall market.


A Bond is any interest-bearing or discounted government or corporate security that obligates the issuer to pay the bondholder a specified sum of money, usually at specific intervals, and to repay the principal amount of the loan at maturity. Bondholders have an IOU from the issuer, but no corporate ownership privileges, as stockholders do.

Call Option

A Call Option gives its buyer the right to buy 100 shares of the underlying security at a fixed price before a specified date in the future - usually three, six, or nine months. For this right, the call option buyer pays the call option seller, called the writer, a fee called a premium, which is forfeited if the buyer does not exercise the option before the agreed-upon date. A call buyer therefore speculates that the price of the underlying shares will rise within the specified time period. For example, a call option on 100 shares of XYZ stock may grant its buyer the right to buy those shares at $100 a piece anytime in the next three months. To buy that option, the buyer may have to pay a premium of $2 a share, or $200. If at the time of the option contract XYZ is selling for $95 a share, the option buyer will profit if XYZ's stock price rises. If XYZ shoots up to $120 a share in two months, for example, the option buyer can exercise his or her option to buy 100 shares of the stock at $100 and then sell the shares for $120 each, keeping the difference as profit (minus the $2 premium per share). On the other hand, if XYZ drops below $95 and stays there for three months, at the end of that time the call option will expire and the call buyer will receive no return on the $2 a share investment premium of $200.

Capital Stocks

Capital Stocks are stocks authorized by a company's charter and having PAR VALUE, STATED VALUE, or NO PAR VALUE. The number and value of issued shares are normally shown, together with the number of shares authorized, in the capital accounts section of the balance sheet. Informally, a synonym for Common Stock, though Capital Stock technically also encompasses Preferred Stock.

Chartered Financial Analyst (CFA)

The CFA designation is awarded by the Institute of Chartered Financial Analysts (ICFA) to experienced financial analysts who pass examinations in economics, financial accounting, portfolio management, security analysis, and standards of conduct. This designation is generally considered to be one of the most difficult and prestigious credentials in the financial industry, at least in terms of investment management.

Chartered Financial Consultant (ChFC)

The ChFC designation is awarded by American College, Bryn Mawr, PA, to a professional financial planner who completes a four-year program covering economics, insurance, taxation, real estate, and other areas related to finance and investing.

Chartered Mutual Fund Counselor (CMFC)

The CMFC designation is the only industry-recognized mutual fund designation. The College for Financial Planning and the Investment Company Institute (ICI) awards designation to financial advisors who complete the examination which covers open & closed end funds, risk/return assessment, asset allocation, retirement planning, and ethics, integrity & professional conduct.

Certified Financial Planner (CFP)

A CFP is a person who has passed examinations accredited by the Denver-based Certified Financial Planner Board of Standards, testing the ability to coordinate a client's banking, estate, insurance, investment, and tax affairs. Financial planners usually specialize in one or more of these areas and consult outside experts as needed. Some planners charge only fees and no money on the implementation of their plans. Others charge a commission on each product or service they sell.

Certified Fund Specialist (CFS)

The CFS designation is provided by the Institute of Business & Finance (IBF) to a financial planner who has completed a 60-hour self-study program. The program topics include, but are not limited to, portfolio theory, dollar-cost averaging, correlation coefficient, first-auto correlation, R-squared and standard deviation. The course includes a final exam, administered by the National Association of Securities Dealers.


Any hard asset, such as grains, foodstuffs, livestock, oil and metals, which are traded on the national exchange.

Common Stocks

Common Stocks are units of ownership of a public corporation. Owners typically are entitled to vote on the selection of directors and other important matters as well as to receive dividends on their holdings. In the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bond and preferred stock take precedence over the claims of those who own common stock.

Compound Annual Return (CAR)

The percentage that a given amount or number would need to increase each year over a multi-year period in order to reach a corresponding cumulative total.


The DAX is the Deutsche Boerse's blue-chip index containing the 30 largest German issues admitted to the Official Market or the Regulated Market at the Frankfurt Stock Exchange.


The MSCI EAFE is a stock market index of foreign stocks, from the perspective of a North American investor. The index is market capitalization weighted and targets coverage of 85% of the market capitalization of the equity market of all countries that are a part of the index. The EAFE acronym stands for "Europe, Australasia, and Far East".

Exchange Traded Fund

A fund that tracks an index, but can be traded like a stock.


The FTSE 100 Index is an index of the 100 largest companies (by market capitalization) in the United Kingdom.

Futures Contract

Futures Contract is an agreement to buy or sell a specific amount of a commodity or financial instrument at a particular price on a stipulated future date. The price is established between buyer and seller on the floor of a commodity exchange, using the open outcry system. A futures contract obligates the buyer to purchase the underlying commodity and the seller to sell it, unless the contract is sold to another before settlement date, which may happen if a trader waits to take a profit or cut a loss. This contrasts with options trading, in which the option buyer may choose whether or not to exercise the option by the exercise date.


The Goldman Sachs Commodity Index is a composite index of commodity sector returns, representing an un-leveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities.

Hang Seng

An index of the share prices of largest securities listed on the Hong Kong Stock exchange. The index is weighted by market capitalization.

High Yield Bond

High Yield Bonds have a rating of BB or lower and pays a higher yield to compensate for its greater risk.

Investment Grade Bond

The iBoxx USD Liquid IG Index is a basket of 100 bonds, rebalanced monthly following the close of the market on the last business day of each month. It is designed to provide balanced representation of the US dollar investment grade corporate market by the means of the most liquid corporate bonds available. All 100 bonds in the basket are equally price-weighted in returns (assuming equal quantity of each bond). The iBoxx USD Liquid IG Index is designed to be a subset of the broader USD corporate bond market, and it may be replicable by portfolio managers; or form the basis of a tradable portfolio.

Maximum Drawdown

A measure of risk which captures the largest percentage drop of an investment from any peak to trough in a given period. It is generally calculated using month-end data. It will show in percentage terms how much money you would have lost (as a percentage) until you return to the investment's break-even point. For example, if you began with a $100,000 investment and you lost $30,000 before that investment returns to its break-even level, then your "maximum draw down" would be measured as 30%.

MSCI All Country World ex-US Index (ACWI ex-US)

The MSCI All Country World ex-US Index consists of approximately 2,000 securities across 47 markets, with emerging markets representing approximately 18%. MSCI attempts to capture approximately 85% of the market capitalization in each country.

MSCI All Country World Index (ACWI)

A free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of June 2007, the MSCI ACWI consisted of 48 country indices comprising 23 developed and 25 emerging market country indices.

Mutual Fund

A Mutual Fund is operated by an investment company that raises money from shareholders and invests it in stocks, bonds, options, futures, currencies, or money market securities. These funds offer investors the advantages of diversification and professional management.


The NAREIT Equity REIT Index is an unmanaged index reflecting performance of the U.S. real estate investment trust market.


The National Association of Securities Dealers Automated Quotation System is a nationwide computerized quotation system for over 5,500 over-the-counter stocks. The index is compiled of more than 4,800 stocks that are traded via this system.


The NASDAQ-100 is a stock market index of 100 of the largest domestic and international non-financial companies listed on the NASDAQ stock exchange based on market capitalization.


The Nikkei 225 Index is composed of the 225 largest stocks on the Tokyo Stock Exchange.

New York Stock Exchange (NYSE)

NYSE was founded in 1792 and it is the oldest and largest stock exchange in the U.S. It is located at 11 Wall Street in New York City and is also known as the Big Board and The Exchange. NYSE is an unincorporated association governed by a board of directors which is headed by a full-time paid chairman and is composed of 24 individuals representing the public and the exchange membership in about equal proportion. Currently, NYSE-listed shares make up more than half of the total dollar volume in shares traded on all U.S. markets. Trading hours: 9:30A.M. to 4:00 P.M. Monday through Friday.


Par is equal to the nominal or face value of a security. A bond selling at par, for instance, is worth the same dollar amount it was issued for or at which it will be redeemed at maturity - typically, $1000 per bond.

Preferred Stocks

Preferred Stocks are a class of Capital Stock that pays dividends at a specified rate and that has preference over common stock in the payment of dividends and the liquidation of assets. Preferred stock does not ordinarily carry voting rights.

Put Option

A Put Option gives its buyer the right to sell a specified number of shares of a stock at a particular price within a specified time period. Put buyers expect the price of the underlying stock to fall. Someone who thinks XYZ's stock price will fall might buy a three-month XYZ put for 100 shares at $100 apiece and pay a premium of $2. If XYZ falls to $80 a share, the put buyer can then exercise his or her right to sell 100 XYZ shares at $100. The buyer will first purchase 100 shares at $80 each and then sell them to the put option seller (writer) at $100 each, thereby making a profit of $18 a share (the $20 a share profit minus the $2 a share cost of the option premium).

Russell 2000

The Russell 2000 is an index that measures the performance of the 2000 smallest companies in the Russell 3000 index, about 105 of its total market capitalization. The average capitalization is approximately $467 million; the median capitalization is $395 million. The Russell 2000 is a popular measure of the stock price performance of small companies.

Russell 3000 Index

The Russell 3000 Index measures the performance of the 3000 largest U.S. companies based on market capitalization, which represents about 98%of the U.S. equity market. The stocks in the index have a market capitalization range of approximately $170 million to $200 billion, with an average of $2.8 billion.

S&P 500 Index

The S & P 500 index is the Standard & Poor’s composite index of 500 stocks, a widely recognized, unmanaged index of common stock prices. The S&P 500 Total Return Index is the total return version of the S&P 500 Index.

Sharpe Ratio

A return / risk ratio developed by William Sharpe. The return (numerator) is defined as the incremental average return over and above the risk-free rate (T-Bills). Risk (denominator) is defined as the standard deviation of these investment returns, i.e., portfolio manager return over and above the risk-free rate (T-Bills). This ratio is also known as the Information Ratio, where the benchmark return is being substituted for the risk-free rate. What you are looking for here is excess return generated per unit of risk. In other words, are returns generated by smart investment decisions or by taking on excess investment risk. In an investment analysis, a higher Sharpe Ratio would indicate a manager or an investment achieving higher rates of return per unit of investment risk.

Standard Deviation

Standard Deviation measures the dispersal or uncertainty in a random variable (in this case, investment returns). It measures the degree of variation of returns around the mean or (average) return. The higher the volatility of the investment returns, the higher the standard deviation will be. For this reason, standard deviation is often used as one measure of investment risk. A more volatile stock or investment would have a higher standard deviation.

Stated Value

Stated Value is an assigned value given to a corporation's stock for accounting purposes in lieu of par value. For example, the stated value may be set at $1 a share, so that if a company issued 10 million shares, the stated value of its stock would be $10 million. The stated value of the stock has no relation to its market price. It is, however, the amount per share that is credited to the capital stock account for each share outstanding and is therefore the legal capital of the corporation. Since state law generally prohibits a corporation from paying dividends or repurchasing shares when doing so would impair its legal capital, stated value does offer stockholders a measure of protection against loss of value.


Stocks are instruments that signify ownership of a corporation represented by shares that are a claim on the corporation's earnings and assets.


U.S. TIPS (Treasury Inflation-Protected Securities) are used to protect a fixed income investment from inflation. TIPS pay a fixed rate of interest. The value of the principal of a TIPS is adjusted semiannually, based on changes in the Consumer Price Index. The interest rate is applied to the inflation-adjusted principal, not the original face value. So, if inflation occurs throughout the life of your security, every interest payment will be greater than the one before it. The converse is true, however, in the event of deflation. Upon maturity, Treasury will pay the greater of either the inflation-adjusted principal or the original face value.

Up Capture / Down Capture

The up and down capture is a measure of how well a manager was able to replicate or improve on phases of positive benchmark returns, and how badly the manager was affected by phases of negative benchmark returns.

Wilshire 5000

A total market index that holds more than 6,500 U.S. stocks.


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