A defined contribution plan offered by a corporation to its employees that allows employees to set aside tax-deferred income for retirement purposes.

A retirement plan offered by nonprofit organizations, such as universities and charitable organizations, rather than corporations. Similar to a 401(k) plan.

The attempt to uncover securities the market has either under- or overvalued and/or the attempt to time investment decisions to be more heavily invested when the market is rising and less so when the market is falling.

The risk of loss due to an agent's/manager's pursuit of his own interests instead of those of the principals/investors.

Adjusted gross income.

A measure of risk-adjusted performance relative to a benchmark. Positive alpha represents outperformance. Negative alpha represents underperformance. Positive or negative alpha may be caused by luck, manager skill, costs, and/or wrong choice of benchmark.

A tax originally targeted at a small number of high-income taxpayers who could claim so many deductions that they owed little or no income tax under the traditional tax code.

The conversion of part or all of the assets in a qualified retirement plan or annuity contract into a stream of regular income payments.

The process by which investors exploit the price difference between two identical securities by simultaneously buying one at a lower price and selling the other at a higher price (thereby avoiding risk). This action locks in a risk-free profit for the arbitrageur (the one engaging in the arbitrage). The trading activity of arbitrageurs eventually eliminates these price differences.

The process of determining what percentage of assets should be dedicated to which specific asset classes. Also, the end result of this process.

A group of assets with similar risk and expected return characteristics. Cash, debt instruments, real estate, and equities are examples of asset classes. Within a major asset class, such as equities, there are more specific classes, such as large and small company stocks and domestic and international stocks.

One one-hundredth of 1 percent, or 0.0001.

Value of the portfolio at the beginning of the reporting period.

An appropriate standard against which mutual funds and other investment vehicles can be judged. Domestic large-cap growth funds should be judged against a large-cap growth index such as the S&P 500 Index, while small-cap managers should be judged against a small-cap index such as the Russell 2000 Index.

The bid is the price at which you can sell a security, and the offer is the price you must pay to buy a security. The spread is the difference between the two prices and represents the cost of a round-trip trade (purchase and sale), excluding commissions.

An accounting concept reflecting the value of a company based on accounting principles. It is often expressed in per-share terms. Book value per share is equal to book equity divided by the number of shares.

The ratio of the book value per share to the market price per share, or book value divided by market capitalization.

Any individual or firm in the business of buying and selling securities for itself and others. Broker-dealers must register with the SEC. When acting as a broker, a broker-dealer executes orders on behalf of his or her client. When acting as a dealer, a broker-dealer executes trades for his or her firm's own account. Securities bought for the firm's own account may be sold to clients or other firms, or they may become a part of the firm's holdings.

An option contract that gives the holder the right, but not the obligation, to buy a security at a predetermined price on a specific date (European call) or during a specific period (American call).

The percentage above the principal amount of a bond that is paid by the issuer when they call the bond.

The increase or decrease in dollar value of all securities in the portfolio for a specified period.

Dollar amount of all purchases not including reinvested dividends/interest/capital gains.

An actively managed fund whose holdings so closely resemble the holdings of an index fund that investors are unknowingly paying larger fees for minimal differentiation.

A statistical term describing how closely the price movements of different securities or asset classes are related. The higher the coefficient, the stronger the relationship between price movements of the two securities/asset classes.

Fully collateralized securities that invest in the commodity futures market with the collateral being a risk-free investment, typically a Treasury security.

Short-term, unsecured promissory notes issued primarily by corporations.

A physical good (such as corn, oil, or gold) that is supplied without significant qualitative differentiation.

Risk that cannot be diversified away (like the risk of owning stocks). The market rewards investors for accepting compensated risk with a risk premium (a greater expected return) commensurate with the amount of risk accepted.

Security that can be exchanged for a specified amount of another, related security at the option of the issuer or the holder.

A tax computation used in determining capital gains. Cost basis is usually the original purchase price of shares owned, including all fees, plus the dollar amount of all reinvested dividends/interest/capital gains.

A measure of price inflation.

The Center for Research in Security Prices is a financial research group at the University of Chicago business school.

The risk that an investment's value will be affected by changes in exchange rates.

The ratio of the coupon rate on a bond to the current price expressed as a percentage. Thus, if you pay par, or one hundred cents on the dollar, for your bond, and the coupon rate is 6 percent, the current yield is 6 percent. If you pay 97 for your 6 percent discount bond, the current yield is 6.186 percent (6 divided by 97). If you pay 102 for a 6 percent bond, the current yield is 5.88 percent (6 divided by 102).

For most securities, Current Value = Quantity × Current Market Price.

A technique for attempting to build predictive real-world models by discerning patterns in masses of historical data.

An unsecured bond backed by the issuer's legally binding promise to pay.

Failure to pay principal or interest in a timely manner.

The face amount of a security.

A financial instrument whose characteristics and value depend on the characteristics and value of an underlying investment, typically a bond, commodity, currency, or equity.

The percent by which the market value of a bond is less than par or face value.

Stocks with high book-to-market values and/or low price-to-earnings ratios. Another name for Value stocks.

Dividing investment funds among a variety of investments with different risk/return characteristics to minimize portfolio risk.

The Dow Jones Industrial Average, a U.S. large-cap stock index reflecting the performance of thirty very large stocks.

The percentage change in the price of a bond that can be expected given a percentage change in the yield on that bond. A higher duration number indicates a greater sensitivity of that bond's price to changes in interest rates.

The Europe, Australasia, Far East Index consists of the stocks of companies from the developed EAFE countries. Very much like the S&P 500 Index, the stocks within the EAFE index are weighted by market capitalization.

A model based on the assumption that investors care about the volatility of their portfolio, in addition to its expected return. The model computes portfolios (mixes of risky investments) that have the highest expected return for every attainable level of volatility.

A state in which trading systems fail to produce expected returns in excess of the market's overall rate of return, because everything currently knowable about a company is already incorporated into its stock price.

A hypothesis that markets are efficient. (See Efficient market.)

The capital markets of less-developed countries that are beginning to acquire characteristics of developed countries, such as higher per capita income. Countries typically included in this category would be Brazil, Mexico, Romania, Turkey, Thailand, and Korea.

Value of the portfolio at the end of a specified period, such as the end of the quarter or the end of the year.

The risk that something unexpected will occur (war, political crisis, flood, or hurricane) negatively impacting the value of a security.

For practical purposes, these act like open-ended, no-load mutual funds. Like mutual funds, they can be created to represent virtually any index or asset class. They are not actually mutual funds. Instead, these new vehicles represent a cross between an exchange-listed stock and an open-ended, no-load mutual fund. Like stocks (but unlike mutual funds), they trade on a stock exchange throughout the day.

Before the fact.

The operating expenses of a mutual fund expressed as a percentage of total assets. These expenses are subtracted from the investment performance of a fund to determine the net return to shareholders. They cover manager fees, administrative costs, and, in some cases, marketing costs.

After the fact.

A tax credit used to reduce or eliminate double taxation when the same income is taxed in two countries.

An agreement to buy or sell a country's currency at a specific price, usually thirty, sixty, or ninety days in the future. This guarantees an exchange rate on a given date. It is typically used to hedge risk, such as currency risk.

The pledge that all taxing powers and resources, without limitation, will, if necessary, be used to repay a debt obligation.

The attempt to uncover mispriced securities by focusing on predicting future earnings.

An agreement to purchase or sell a specific collection of securities or a physical commodity at a specified price and time in the future. For example, an S&P 500 futures contract represents ownership interest in the S&P 500 Index, at a specified price for delivery on a specific date on a particular exchange.

Stocks with low book-to-market values and/or high price-to-earnings ratios. Another name for Growth stocks.

Choosing to invest in companies having positive environmental records. Green investing is a special category of Socially responsible investing.

Companies that have relatively high price-to-earnings (P/E) ratios or relatively low book-to-market (BtM) ratios (the opposite of value stocks) because the market anticipates rapid earnings growth, relative to the overall market. We are interested in a stock's earnings ratio because academic evidence indicates that investors can expect to be rewarded by investing in value companies' stocks. They are considered to be riskier investments (compared with growth companies' stocks), so investors demand a "risk premium" to invest in them.

A fund that generally has the ability to invest in a wide variety of asset classes. These funds often use leverage in an attempt to increase returns.

See Junk bond.

A security with both equity and fixed-income characteristics. Examples of hybrids are convertible bonds, preferred stocks, and junk bonds.

A bond that provides both a fixed rate of return and an inflation protection component. The principal value of the bond increases by the total of the fixed rate and the inflation component. The income is deferred until funds are withdrawn from the account holding the bond.

Dividends and/or interest income.

A passively managed fund that seeks to replicate the performance of a particular index, such as the Wilshire 5000, the S&P 500, or the Russell 2000. The fund may replicate the index by buying and holding all the securities in that index in direct proportion to their weight (by market capitalization) within that index. The fund could sample the index (a common strategy for small-cap and total market index funds) and/or use index futures and other derivative instruments.

The Internal Rate of Return provides a measure of the growth of the portfolio in absolute terms. Size and timing of contributions and withdrawals of cash and securities influence IRR, as well as the performance of those securities. The IRR is useful for determining whether the portfolio is growing fast enough to meet future needs or goals. In the absence of capital flows, the Time Weighted Rate of Return (TWR) and the IRR are identical.

Capital appreciation plus income, less fees and/or other expenses.

The first offering of a company's stock to the public.

A bond whose credit quality is at least adequate to maintain debt service. Moody's Investors Service investment grade ratings are Baa and higher. Standard & Poor's are BBB and higher. Below-investment-grade ratings suggest a primarily speculative credit quality.

This statement provides the investor's financial goals and the strategies employed to achieve them. Specific information on matters such as asset allocation, risk tolerance, and liquidity requirements should be included in the IPS. An IPS becomes more powerful if it is in writing, dated, and signed.

A tax-advantaged individual retirement account.

A bond rated below investment grade. Also referred to as a High-yield bond.

The degree to which exceptional values, much larger or smaller than the average, occur more frequently (high kurtosis) or less frequently (low kurtosis) than in a normal (bell shaped) distribution. High kurtosis results in exceptional values called "fat tails." Low kurtosis results in "thin tails."

Large-cap stocks are those of companies considered big relative to other companies, as measured by their Market capitalization. Precisely what is considered a "large" company varies by source. For example, one investment professional may define it as having a market cap in excess of $2 billion, while another may use $5 billion.

The use of debt to increase the amount of assets that can be acquired (for example, to buy stock). Leverage increases the riskiness as well as the expected return of a portfolio.

An acquisition of a business using mostly debt and a small amount of equity. Assets of the business secure the debt.

A measure of the ease of trading a security in the market.

A game in which the odds of winning are so low it does not pay to play.

Modified adjusted gross income.

Total amount charged to an account for management of a portfolio.

The difference between a retail investor's selling price and the wholesale price (the price in the interdealer market).

For an individual stock, this is the total number of shares of common stock outstanding, multiplied by the current price per share. For example, if a company has 100 million shares outstanding and its current stock price is $30 per share, the market cap of this company is $3 billion.

The date on which the issuer promises to repay the principal.

The process of identifying optimal mean-variance portfolios, that is, portfolios with the highest expected return among all portfolios with the same variance/standard deviation; or equivalently, portfolios with the lowest variance/standard deviation among all portfolios with the same expected return.

A late-stage venture capital investment, usually the final round of financing prior to an IPO, typically used by companies expecting to go public within six to twelve months. The financing is usually structured to be repaid from proceeds of a public offering.

The smallest stocks by market capitalization: the ninth and tenth CRSP deciles. Other definitions used are the smallest 5 percent of stocks by market capitalization and stocks with a market capitalization of less than about $200 million.

A body of academic work founded on four concepts. First, markets are too efficient to allow expected returns in excess of the market's overall rate of return to be achieved consistently through trading systems. Active management is therefore counterproductive. Second, over sustained periods, asset classes can be expected to achieve returns commensurate with their level of risk. Riskier asset classes, such as small companies and value companies, will produce higher returns as compensation for their higher risk. Third, diversification across asset classes can increase returns and reduce risk. For any given level of risk, a portfolio can be constructed producing the highest expected return. Fourth, there is no one right portfolio for every investor. Each investor must choose an asset allocation that results in a portfolio with an acceptable level of risk for that investor's specific situation.

A method for approximating the answer to certain questions in mathematics, physics, and finance using statistical analysis (using a random number generator) where a direct answer in closed form is either not possible or exceptionally difficult to obtain.

A financial instrument representing an interest in a pool of mortgage loans.

See Modern portfolio theory.

See EAFE Index.

The National Association of Securities Dealers Automated Quotations is a computerized marketplace in which securities are traded, frequently called the "over-the-counter market."

For a mutual fund, its NAV is the total value of portfolio holdings minus the total value of all liabilities. The NAV is usually calculated on a daily basis and quoted per share. For example, "NAV is $14.68 per share."

Cash deposits plus the market value of securities deposited into the portfolio, minus all cash withdrawals and the market value of securities transferred out.

When one asset experiences above average returns, the other tends to experience below average returns, and vice versa.

A mutual fund that does not impose any charge for purchases or sales and has no 12(b)-1 fees.

Returns that have not been adjusted for inflation.

The New York Stock Exchange, which traces its origins to 1792, is the world's leading equities market. A broad spectrum of market participants, including listed companies, individual investors, institutional investors, and member firms participate in the NYSE market.

In clients' reports from their advisers or broker/dealers, other expenses represent fees associated with transactions, such as SEC fees or postage and handling.

The ratio of stock price-to-earnings per share. Stocks with high P/E ratios are considered growth stocks; stocks with low P/E ratios are considered value stocks.

One hundred percent of face value. Most bonds have a face value of $1,000. They are also traded in blocks of a minimum of $1,000. Par is considered $1,000.

Mutual funds that buy and hold common stocks within a particular domestic or international asset class. The amount of each security purchased is typically in proportion to its capitalization relative to the total capitalization of all securities within the asset class. Each stock is held until it no longer fits the definition and guidelines established for remaining in that asset class. Passive asset class funds provide the building blocks needed to implement a passive management strategy.

Passive management is a buy-and-hold investment strategy, specifically contrary to active management. Characteristics of the passive management approach include lower portfolio turnover, lower operating expenses and transactions costs, greater tax efficiency, consistent exposure to risk factors over time, and a long-term perspective.

The amount, if any, by which the price exceeds the principal amount (par value) of a bond.

The face value of a bond, exclusive of interest.

A doctrine imbedded within the American legal code stating that a person responsible for the management of someone else's assets must manage those assets in a manner appropriate to the beneficiary's financial circumstances and tolerance for risk.

In clients' reports from their advisers or broker/dealers, purchases represent the dollar amount of a particular position purchased during a specified period.

An option contract giving the holder the right, but not obligation, to sell a security at a predetermined price on a specific date (European put) or during a specific period (American put).

In clients' reports from their advisers or broker/dealers, the quantity represents the number of a security's shares, units, or option contracts held on the "as of" date.

Returns adjusted for inflation.

The process of restoring a portfolio towards its original asset allocation. Rebalancing can be accomplished either through adding newly investable funds or by selling portions of the best performing asset classes and using the proceeds to purchase additional amounts of the underperforming asset classes.

As represented by REITs, real estate is a separate asset class. REITs have their own risk and reward characteristics, as well as relatively low correlation with other equity and fixed-income asset classes. Investors can purchase shares of a REIT in the same way they would purchase other equities, or they can invest in a REIT mutual fund that is either actively or passively managed.

The process of retiring existing bonds at or prior to maturity. It also refers to redeeming shares in a mutual fund by selling the shares back to the sponsor.

A designation that a financial consultant's firm is registered with the appropriate national (SEC) or state regulators and that the RIA representatives for that firm have passed required exams. RIA is not an accredited professional designation.

The risk that future interest and principal payments, when received, will earn lower-than-current rates.

The higher expected (not guaranteed) return for accepting a specific type of nondiversifiable risk.

The smallest 2,000 of the largest 3,000 publicly traded U.S. stocks. A common benchmark for small-cap stocks.

Mutual funds sold to the public, as opposed to institutional investors.

In clients' reports from their advisers or broker/dealers, the dollar amount of a particular position sold during a specified period. This figure will include any dividends paid in cash.

The trading market for outstanding bonds and notes. This is an over-the-counter market and a free-form negotiated method of buying and selling, usually conducted by telephone or a trading system such as Bloomberg's.

The correlation of a variable with itself over successive time intervals. Also known as autocorrelation.

A government commission created by Congress to regulate the securities markets and protect investors. The SEC has jurisdiction over the operation of broker-dealers, investment advisers, mutual funds, and companies selling stocks and bonds to the investing public.

A measure of the return earned above the rate of return on riskless one-month U.S. Treasury bills relative to the risk taken, with risk being measured by the standard deviation of returns. Example: The average return earned on an asset was 10 percent. The average rate of one-month Treasury bills was 4 percent. The standard deviation was 20 percent. The Sharpe Ratio would be equal to 10 percent minus 4 percent (6 percent), divided by 20 percent, or 0.3.

Borrowing a security for the purpose of immediately selling it. This is done with the expectation that the investor will be able to buy the security back at a later date (and lower price), returning it to the lender and keeping any profit.

A measure of the asymmetry of a distribution. Negative skewness occurs when the values to the left of (less than) the mean are fewer but farther from the mean than values to the right of the mean. For example: The return series of −30 percent, 5 percent, 10 percent, and 15 percent has a mean of 0 percent. There is only one return less than zero percent and three higher; but the negative one is much further from zero than the positive ones. Positive skewness occurs when the values to the right of (or more than) the mean are fewer but farther from the mean than are values to the left of the mean.

Small-cap stocks are those of companies considered small relative to other companies, as measured by their Market capitalization. Precisely what is considered a "small" company varies by source. For example, one investment professional may define it as having a market cap of less than $2 billion, while another may use $5 billion. We are interested in a stock's capitalization because academic evidence indicates that investors can expect to be rewarded by investing in smaller companies' stocks. They are considered to be riskier investments than larger companies' stocks, so investors demand a "risk premium" to invest in them.

The difference between the price a dealer is willing to pay for a bond (the bid) and the price at which a dealer is willing to sell a bond (the offer).

Investment strategy seeking to maximize both financial return and social good.

A market-cap weighted index of 500 of the largest U.S. stocks, designed to cover a broad and representative sampling of industries.

Fixed-income investment vehicles offered through defined contribution savings plans and IRAs. The assets in stable-value funds are generally high quality bonds and insurance contracts purchased directly from banks and insurance companies that guarantee to maintain the value of the principal and all accumulated interest. However, stable value funds may hold bonds of less than investment grade, as well as equities.

A measure of volatility or risk. The greater the standard deviation, the greater the volatility of a portfolio. Standard deviation can be measured for varying time periods, such as monthly, quarterly, or annually.

Style drift occurs when the portfolio moves away from its original asset allocation, either by the purchase of securities outside the particular asset class a fund represents or by not rebalancing to adjust for significant differences in performance of the various asset classes in the portfolio.

A debt ranking below another liability in order of priority for payment of interest or principal.

Funds that perform poorly close due to redemptions by investors or by being merged out of existence. Failing to include the performance data of all funds that existed during an analysis period—whether or not the funds disappeared—can skew results, making them appear better than the reality.

An investment strategy recognizing companies that are moving society towards sustainability. It relies on a consensus-based scientific definition of sustainability developed by researchers at the Blekinge Institute of Technology in Sweden. It is a special category of Socially responsible investing.

Risk that cannot be diversified away. The market must reward investors for taking systematic risk, or they would not take it. That reward is in the form of a risk premium, a higher expected return than could be earned by investing in a less risky instrument.

The number of years left until the maturity date of a bond.

Differences in performance between diversified equity portfolios are best explained by the amount of exposure to the risk of the overall stock market, company size (market capitalization), and price (book-to-market [BtM] ratio) characteristics. Research has shown that, on average, the three factors explain more than 96 percent of the variation in performance of diversified U.S. stock portfolios.

A rate-of-return measure of portfolio performance giving equal weight to each period regardless of any differences in amounts invested in each period. The TWR removes the impact caused by timing and the size of all capital flows. Because an investment manager typically has no control over contributions and withdrawals, the TWR is more suitable than the Internal Rate of Return (IRR) for determining the relative skill of the manager, or to compare to a market index or other managers. In the absence of capital flows, TWR and IRR are identical.

See Treasury Inflation-Protected Security.

The amount by which the performance of a fund differs from the appropriate index or benchmark. More generally, when referring to a whole portfolio, the amount by which the performance of the portfolio differs from a widely accepted benchmark, such as the S&P 500 Index or the Wilshire 5000 Index.

The extent to which pricing information for a security is readily available to the general public.

Obligations carrying the full faith and credit of the U.S. government.

Treasury instruments with a maturity of up to one year. Bills are issued at a discount to par. The interest is paid in the form of the price rising toward par until maturity.

Treasury instruments whose maturity is more than ten years.

Treasury instruments whose maturity is more than one year, but not greater than ten.

A bond that receives a fixed stated rate of interest, but also increases its principal by the changes in the Consumer Price Index. Its fixed interest payment is calculated on the inflated principal, which is eventually repaid at maturity.

The trading activity of a fund as it sells securities and replaces them with new ones.

Risk that can be diversified away, like the risk of owning a single stock or sector of the market. Since the risk can be diversified away, investors are not rewarded with a risk premium (higher expected return) for accepting this type of risk. Also called "unsystematic risk."

A bond backed solely by a good faith promise of the issuer.

See Uncompensated risk.

The stocks of companies with relatively low price-to-earnings (P/E) ratios or relatively high book-to-market (BtM) ratios: the opposite of growth stocks. The market anticipates slower earnings growth relative to the overall market. They are considered to be riskier investments than growth companies' stocks, so investors demand a "risk premium" to invest in them.

A life insurance annuity contract providing future payments to the holder. The size of the future payments will depend on the performance of the portfolio's securities, as well as the investor's age at the time of "annuitization" and prevailing interest rates.

An investment in a start-up firm or small business prior to its initial public offering. Typically entails a high degree of risk.

The standard deviation of the change in value of a financial instrument within a specific time horizon. It is often used to quantify the risk of the instrument over that time period. Volatility is typically expressed in annualized terms.

The tax code prohibits claiming a loss on the sale of an investment if a same, or a substantially similar, investment was purchased within thirty days before or after the sale date.

Percentage value of a security or asset class held in a portfolio relative to the value of the total portfolio.

Graph depicting the relationship between yields and current term to maturity for fixed-income investments with approximately the same default risk.

A discount bond on which no current interest is paid. Instead, at maturity, the investor receives compounded interest at a specified rate. In taxable accounts, the difference between the discount price at purchase and the accreted value at maturity is not taxed as a capital gain, but is considered interest and usually taxed each year, not deferred until maturity.