Module 2 Vocab Flashcards
Alpha
The excess return of an investment relative to the return of a benchmark
Annuity
An insurance product that provides a series of equal dollar periodic payments
Barbell Strategy
The bond portion is split into short term and long term staggered maturities of bonds to create a steady source of income.
For example, the short term bonds would be 1-5 year maturities, then the long term port would be 15-20 year maturities. When the bond matures, or reaches the bottom of that portions maturities, it is sold to buy the longest maturity of each portion.
Beta Coefficient
A measure of a securities systematic risk that cannot be diversified. It is the measure of volatility relative to the volatility of a similar benchmark
Coefficient of Variation (CV)
The coefficient of variation is the standard deviation divided by the mean return. It is a relative measure of risk per return that allows you to compare different investments.
Contrarian Investment Strategy
Contrarian investing is buying securities that are out of favor and selling those that have become popular
Core-Satellite Asset Allocation
70-80% of the portfolio is invested into the broader index based market, while the rest is invested into a tactical strategy that seeks to profit from market movement/ opportunity
Correlation Coefficient
A measure of how closely correlated two assets are
Defined benefit plan
A qualified retirement plan that defines what that benefits will be at retirement like a pension
Defined contribution plan
A qualified retirement plan that provides an individual account for each participant and specifies the annual contribution of the employer to the participants account
Dollar cost averaging
Investing equal dollar amounts regularly of specific time periods to minimize the impact of bad market timing
Duration
an indication of the price sensitivity of a bond to the changes in interest rates.
The higher the duration, the greater the potential volatility from interest rate changes
Duration * interest rate change = price change
Early (premature) distribution
A distribution from a qualified plan, IRA, 401k, or similar account before age 59 1/2
Fundamental Analysis
Fundamental analysis focuses on market, industry, and corporate data and forecasts to determine intrinsic value
Income replacement fund (managed payout fund)
The purpose is to provide retirees with a stream of cash flow during their retirement years.
Investment policy
A coherent set of guidelines for managing financial assets that is in line with the stated objectives and market realities.
Keogh (HR 10) plan
A qualified retirement plan for self-employed individuals through a sole proprietorship or partnership. Keoughs can be established as either defined contribution or defined benefit plans
Ladder strategy
aka staggered maturity strategy; spreads equal amounts across different maturities to offset interest rate risk
Longevity Insurance
A deferred annuity typically purchased at 65 but not annuitized until 80 or 85 to avoid running out of money during the later years of retirement
Low P/E strategy
Buying companies with low P/E rations that are out of favor and have low expectations of earnings growth.
Pension plan
a pension plan is either a defined benefit or defined contribution plan.
Profit sharing plan
A qualified defined contribution plan that features a variable contribution from the employer based on a percentage or formula. Contributions typically are related to the profits of the business each year, but some like 401ks provide contributions regardless of profits
Qualified plan
A retirement plan that meets the requirements of the Internal Revenue Code (IRC) and have unique tax advantages for employers and plan participants
Sector rotation
A timing strategy that shifts portfolio assets from one sector of the economy to another in anticipation of market movement
Sharpe Ratio
Relates that return on a portfolio to the degree of risk taken.This is useful for comparing the return per unit of risk of different investments.
Simplified Employee Pension (SEP)
A pension plan established by a business for its employees. Contributions are deposited into employees IRAs
Small firm effect
The tendency of small-cap stocks to outperform large-cap stocks
Strategic Asset Allocation
Strategic allocation attempts to achieve the best long term risk/return balance with the assets in the portfolio.
Tactical Asset Allocation
This approach actively moves funds to from overvalued assets to to undervalued assets. It is an active market timing strategy
Tax Deductible
Expenses that can be deducted from current taxable income
Tax deferred
Earnings or income that is not subject to federal income taxes until a later date.
Tax-Deferred Annuity (TDA) plan
A TDA allows you to avoid paying income taxes on contributions until you retire
Technical Analysis
Technical analysis is based on the idea that market trends and supply/demand exist in stocks which repeat.
Treynor ratio
The Treynor ratio is similar to the Sharpe ratio. The Treynor ratio relates the return of an investment to the degree of systematic risk take (as measured by beta).
The Treynor ratio is bested used to compare diversified portfolios since it uses systematic risk as its risk variable
Value averaging
Investing the equal amount in value at each specified regular interval. If you commit to contribute $200 per month, and your investments are up $50 you contribute only $150. If the investments are down $50, you would contribute $250
