Glossary

Active investing refers to an investment strategy that involves ongoing buying and selling activity by the manager. This constitutes purchasing investments and continuously monitoring their activity to exploit profitable conditions.

Alpha is a measure of the difference between a security or portfolio’s actual returns and its expected performance, given its level of risk (as measured by beta.)  Alpha is often seen as a measure of the value added or subtracted by a portfolio manager.

An alternative investment is an asset that is not one of the conventional investment types, such as stocks, bonds and cash. Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of the complex natures and limited regulations of the investments. Alternative investments include private equity, hedge funds, managed futures, real estate, commodities and derivatives contracts.

For a single bond, the average effective maturity is a measure of maturity that considers the possibility that a bond might be called back by the issuer. For a portfolio of bonds, average effective maturity is the weighted average of the maturities of the underlying bonds.

Barbell is an investment strategy applicable primarily to a fixed income portfolio, in which half the portfolio is made up of long-term bonds and the other half of very short-term bonds. The “barbell” term is derived from the fact that this investment strategy looks like a barbell, heavily weighted at both ends and with little to nothing in between.

The barbell strategy in fixed income is the opposite of a “bullet” strategy, in which the portfolio is concentrated in bonds of a particular maturity or duration.

The Barra Risk Factor Analysis is a multi-factor model, created by Barra Inc., used to measure the overall risk associated with a security relative to the market. Barra Risk Factor Analysis incorporates over 40 data metrics, including earnings growth, share turnover and senior debt rating. The model then measures risk factors associated with three main components: industry risk, risk from exposure to different investment themes and company-specific risk.

Beta is a measure of the volatility, or systematic risk, of a security or portfolio in comparison to the market as a whole. Beta is used in capital asset pricing model (CAPM), which calculates the expected return of an asset based on its beta and expected market returns. Beta is also known as the beta coefficient.

The term bid and ask (also known as bid and offer) refers to a two-way price quotation that indicates the best price at which a security can be sold and bought at a given point in time. The bid price represents the maximum price that a buyer is willing to pay for a security. The ask price represents the minimum price that a seller is willing to receive. A trade or transaction occurs after the buyer and seller agree on a price for the security. 

The difference between bid and ask prices, or the spread, is a key indicator of the liquidity of the asset. In general, the smaller the spread, the better the liquidity.

Capital gain is a rise in value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on income taxes.

Clean shares are a relatively new class of mutual fund shares. The mutual fund industry introduced clean shares in response to the Department of Labor’s fiduciary rule. This conflict-of-interest rule was designed to put an end to unscrupulous behavior among financial advisors, such as recommending more expensive fund options to clients so they can collect higher commissions. Because clean shares provide one uniform price across the board, advisors are not tempted to push an expensive fund over a more affordable one.

The expense ratio, also known as the management expense ratio (MER), measures how much of a fund’s assets are used for administrative and other operating expenses. An expense ratio is determined by dividing a fund’s operating expenses by the average dollar value of its assets under management (AUM). Operating expenses reduce the fund’s assets, thereby reducing the return to investors.

R-squared is the percentage of a security or portfolio’s return movements that are explained by movements in its benchmark index, showing the degree of correlation between the security or portfolio and the benchmark.  This figure is helpful in assessing how likely it is that beta and alpha are statistically significant.  A value of 1 indicates perfect correlation between the security or portfolio and its benchmark.  The lower the R-squared value, the lower the correlation.

Sharpe Ratio uses standard deviation and excess return (a measure of a security or portfolio’s return in excess of the U.S. Treasury three-month Treasury Bill) to determine the reward per unit of risk.

Standard deviation is a statistical measure of the volatility of the security or portfolio’s returns.  The larger the standard deviation, the greater the volatility of return.

The turnover ratio is the percentage of a mutual fund or other investment’s holdings that have been replaced in an given year, which varies by the type of mutual fund, its investment objective and/or the portfolio manager’s investing style. For example, a stock index fund will have a very low turnover rate, but a bond fund will have high turnover because active trading is an inherent quality of bond investment; likewise, and aggressive small-cap growth stock fund will generally experience higher turnover than a large-cap value stock fund Also, the more portfolio turnover in a fund, the more likely it will generate short-term capital gains, which are taxable at an investor’s ordinary income rate.