Investment Terms And Analogies

Question 1

What is a stock?

Answer 1

A share of ownership in a company, representing a claim on part of its assets and earnings.

Question 2

What is a bond?

Answer 2

A loan made by an investor to a borrower, typically with regular interest payments and return of principal.

Question 3

What is an ETF?

Answer 3

An Exchange-Traded Fund—a basket of securities that trades like a stock.

Question 4

What is a mutual fund?

Answer 4

A professionally managed pooled investment vehicle that invests in various assets.

Question 5

What does NAV stand for?

Answer 5

Net Asset Value—the per-share value of a mutual fund or ETF.

Question 6

What is diversification?

Answer 6

Spreading investments across assets or asset classes to reduce risk.

Question 7

What is asset allocation?

Answer 7

Dividing a portfolio among asset categories to match goals and risk tolerance.

Question 8

What is rebalancing?

Answer 8

Adjusting a portfolio back to its target asset allocation.

Question 9

What is total return?

Answer 9

The full return on an investment, including price appreciation and income.

Question 10

What is CAGR?

Answer 10

Compound Annual Growth Rate—annualized return over time with compounding.

Question 11

What is YTD return?

Answer 11

Year-to-date return—performance from Jan 1 to the current date.

Question 12

What is alpha?

Answer 12

Excess return relative to a benchmark.

Question 13

What is beta?

Answer 13

Volatility relative to the market.

Question 14

What is the Sharpe ratio?

Answer 14

Risk-adjusted return = (Return - Risk-free rate) / Standard deviation.

Question 15

What is standard deviation?

Answer 15

A measure of variability in returns.

Question 16

What is a benchmark?

Answer 16

A standard used to compare investment performance.

Question 17

What is the P/E ratio?

Answer 17

Price-to-Earnings ratio; stock price ÷ earnings per share.

Question 18

What does a high P/E ratio suggest?

Answer 18

High expected growth or possible overvaluation.

Question 19

What is the PEG ratio?

Answer 19

P/E ratio divided by earnings growth rate.

Question 20

What is the P/B ratio?

Answer 20

Price-to-Book ratio; stock price ÷ book value per share.

Question 21

What is dividend yield?

Answer 21

Annual dividend ÷ share price.

Question 22

What is EV/EBITDA?

Answer 22

Enterprise Value divided by EBITDA—a valuation tool.

Question 23

What is market capitalization?

Answer 23

Total value of a company’s outstanding shares.

Question 24

What does ‘overvalued’ mean?

Answer 24

Stock trades above what its fundamentals justify.

Question 25

What is volatility?

Answer 25

How much an asset's price moves over time.

Question 26

What is standard deviation in a portfolio?

Answer 26

A measure of how much returns fluctuate from the average.

Question 27

What does a beta >1 mean?

Answer 27

More volatile than the market.

Question 28

What does a beta <1 mean?

Answer 28

Less volatile than the market.

Question 29

What is drawdown?

Answer 29

The decline from a peak to a trough during a specific period.

Question 30

What is correlation?

Answer 30

How two investments move relative to each other.

Question 31

What is negative correlation good for?

Answer 31

Reducing risk by balancing opposing movements.

Question 32

What is downside deviation?

Answer 32

Standard deviation of only negative returns.

Question 33

What is a bond’s coupon rate?

Answer 33

The annual interest as a % of face value.

Question 34

What is yield to maturity (YTM)?

Answer 34

Total return if a bond is held to maturity.

Question 35

What is bond duration?

Answer 35

Sensitivity of bond price to interest rate changes.

Question 36

What is convexity in bonds?

Answer 36

How duration changes as rates change.

Question 37

What is credit rating?

Answer 37

An issuer's creditworthiness score.

Question 38

What is interest rate risk?

Answer 38

Risk of bond prices falling when rates rise.

Question 39

What is reinvestment risk?

Answer 39

Risk that future cash flows must be reinvested at lower rates.

Question 40

What is call risk?

Answer 40

Risk that a bond is redeemed early when rates fall.

Question 41

What is an expense ratio?

Answer 41

Annual fee as a % of assets under management.

Question 42

What is fund turnover?

Answer 42

How frequently a fund’s holdings change annually.

Question 43

What’s the difference between active and passive funds?

Answer 43

Active tries to beat the market; passive tracks an index.

Question 44

What is tracking error?

Answer 44

How closely a fund follows its benchmark.

Question 45

What is style drift?

Answer 45

When a fund strays from its stated strategy.

Question 46

What does 'net expense ratio' include?

Answer 46

Ongoing fees after accounting for waivers/reimbursements.

Question 47

Can ETFs have capital gains distributions?

Answer 47

Yes, but less frequently than mutual funds.

Question 48

What is dollar-cost averaging?

Answer 48

Investing a fixed amount regularly regardless of price.

Question 49

What is tax-loss harvesting?

Answer 49

Selling losing assets to offset gains and reduce taxes.

Question 50

What is a glide path?

Answer 50

Shifting to a more conservative allocation as retirement nears.

Question 51

What is home bias?

Answer 51

Overweighting domestic investments and underweighting foreign.

Question 52

What is sequence of returns risk?

Answer 52

Negative early returns can harm retirement income sustainability.

Question 53

What is rebalancing drift?

Answer 53

When allocations shift too far from targets and need correction.

Question 54

What is investor return vs. investment return?

Answer 54

Investor return includes behavior (timing), investment assumes staying invested.

Question 55

What is performance chasing?

Answer 55

Buying after strong performance, often resulting in poor outcomes.

Question 56

What’s the behavioral benefit of automation?

Answer 56

It removes emotion and creates consistency over time.

Question 57

ADHD analogy for diversification?

Answer 57

It’s like a potluck—you bring several dishes because you don’t know which will be a hit.

Question 58

ADHD analogy for rebalancing?

Answer 58

Like checking your car tires—if one’s low, you adjust it to stay balanced.

Question 59

ADHD analogy for dollar-cost averaging?

Answer 59

Like buying groceries every week—you pay more or less, but you average out.

Question 60

ADHD analogy for risk tolerance?

Answer 60

Like choosing a rollercoaster—some love big drops, others want gentle hills.

Question 61

ADHD analogy for beta?

Answer 61

Like caffeine strength—triple shot espresso = high beta.

Question 62

ADHD analogy for volatility?

Answer 62

Like your phone vibrating on a glass table—lots of movement, not much change.

Question 63

ADHD analogy for sequence of returns?

Answer 63

Pouring a drink on a rocky boat—early rough seas spill more.

Question 64

ADHD analogy for tax-loss harvesting?

Answer 64

Like turning spoiled fruit into compost—it feeds future growth.

Question 65

ADHD analogy for timing the market?

Answer 65

Like jumping onto a moving treadmill—possible, but risky.

Question 66

ADHD analogy for staying invested?

Answer 66

Like planting a tree—you don’t dig it up every time it rains.