Glossary

Word of the day

Multi-Factor Model

A statistical model that is build on regression analysis to uncover variables or factors that supposedly lead to out-sized returns.

Mutual Funds

A portfolio of securities managed by a professional investment company.

Price-to____ Ratio

A simple pricing mechanism that takes a stocks price and divides it by some common demoniator. For instance, many market participants use Price-to-Earnings to judge whether or not a stock is priced correctly.

Beta

A fancy word to describe market risk.

Tax Exempt

Meaning that capital appreciation, dividends and interest earned in the account is not taxed, even at withdrawal.

Alpha

The residual return after accounting for return of the benchmark. May be positive or negative.

Index

See also: Benchmark. It is the market portfolio against which real life portfolios are measured.

Correlation

The direction and magnitude with which two assets move together. Ranges between -1 and +1.

Diversification

The idea that when uncorrelated assets are put together in a portfolio an investor can earn higher risk-adjusted returns.

Efficient Markets

The idea that all known knowledge is currently in a stock price.

Terms and Definitions

Alpha

The residual return after accounting for return of the benchmark. May be positive or negative.

Basis Point

One-one hundredth of a percent or 1 Basis Point = 0.01%

Benchmark

The market portfolio. What real life portfolios are compared to.

Beta

A fancy word to describe market risk.

Correlation

The direction and magnitude with which two assets move together. Ranges between -1 and +1.

Diversification

The idea that when uncorrelated assets are put together in a portfolio an investor can earn higher risk-adjusted returns.

Duration

Measures interest rate risk in a bond.

Efficient Markets

The idea that all known knowledge is currently in a stock price.

Exchange Traded Funds

Also known as “ETFs”. It is a basket of stocks or bonds that trades on an exchange like a stock.

Regression

A statistical technique used to measure the relation between two variables. Often times two variables are “regressed” against one another to see if there is any predictive ability.

Index

See also: Benchmark. It is the market portfolio against which real life portfolios are measured.

Market Capitalization

The size of a company. It is its stock price times shares outstanding.

Multi-Factor Model

A statistical model that is build on regression analysis to uncover variables or factors that supposedly lead to out-sized returns.

Mutual Funds

A portfolio of securities managed by a professional investment company.

Price-to____ Ratio

A simple pricing mechanism that takes a stocks price and divides it by some common demoniator. For instance, many market participants use Price-to-Earnings to judge whether or not a stock is priced correctly.

Risk

See Also: Volatility. This is the degree to which a stock price bumps around as defined by modern portfolio theory. It may also be defined as the permanent loss of capital.

Time Weighted Returns

The percent return an investor earns in an investment adjusted for cash in and out flows.

Tax Deferred

A technique to delay taxes in an account until withdrawal. A 401(k) or IRA is a “Tax-Deferred” savings vehicle.

Tax Exempt

Meaning that capital appreciation, dividends and interest earned in the account is not taxed, even at withdrawal.

Volatility

The bouncing around of a stock price.

Yield

The income generated on an investment.

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