Module 2 Vocab

Question 1

Alpha

Answer 1

The excess return of an investment relative to the return of a benchmark

Question 2

Annuity

Answer 2

An insurance product that provides a series of equal dollar periodic payments

Question 3

Barbell Strategy

Answer 3

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.

Question 4

Beta Coefficient

Answer 4

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

Question 5

Coefficient of Variation (CV)

Answer 5

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.

Question 6

Contrarian Investment Strategy

Answer 6

Contrarian investing is buying securities that are out of favor and selling those that have become popular

Question 7

Core-Satellite Asset Allocation

Answer 7

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

Question 8

Correlation Coefficient

Answer 8

A measure of how closely correlated two assets are

Question 9

Defined benefit plan

Answer 9

A qualified retirement plan that defines what that benefits will be at retirement like a pension

Question 10

Defined contribution plan

Answer 10

A qualified retirement plan that provides an individual account for each participant and specifies the annual contribution of the employer to the participants account

Question 11

Dollar cost averaging

Answer 11

Investing equal dollar amounts regularly of specific time periods to minimize the impact of bad market timing

Question 12

Duration

Answer 12

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

Question 13

Early (premature) distribution

Answer 13

A distribution from a qualified plan, IRA, 401k, or similar account before age 59 1/2

Question 14

Fundamental Analysis

Answer 14

Fundamental analysis focuses on market, industry, and corporate data and forecasts to determine intrinsic value

Question 15

Income replacement fund (managed payout fund)

Answer 15

The purpose is to provide retirees with a stream of cash flow during their retirement years.

Question 16

Investment policy

Answer 16

A coherent set of guidelines for managing financial assets that is in line with the stated objectives and market realities.

Question 17

Keogh (HR 10) plan

Answer 17

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

Question 18

Ladder strategy

Answer 18

aka staggered maturity strategy; spreads equal amounts across different maturities to offset interest rate risk

Question 19

Longevity Insurance

Answer 19

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

Question 20

Low P/E strategy

Answer 20

Buying companies with low P/E rations that are out of favor and have low expectations of earnings growth.

Question 21

Pension plan

Answer 21

a pension plan is either a defined benefit or defined contribution plan.

Question 22

Profit sharing plan

Answer 22

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

Question 23

Qualified plan

Answer 23

A retirement plan that meets the requirements of the Internal Revenue Code (IRC) and have unique tax advantages for employers and plan participants

Question 24

Sector rotation

Answer 24

A timing strategy that shifts portfolio assets from one sector of the economy to another in anticipation of market movement

Question 25

Sharpe Ratio

Answer 25

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.

Question 26

Simplified Employee Pension (SEP)

Answer 26

A pension plan established by a business for its employees. Contributions are deposited into employees IRAs

Question 27

Small firm effect

Answer 27

The tendency of small-cap stocks to outperform large-cap stocks

Question 28

Strategic Asset Allocation

Answer 28

Strategic allocation attempts to achieve the best long term risk/return balance with the assets in the portfolio.

Question 29

Tactical Asset Allocation

Answer 29

This approach actively moves funds to from overvalued assets to to undervalued assets. It is an active market timing strategy

Question 30

Tax Deductible

Answer 30

Expenses that can be deducted from current taxable income

Question 31

Tax deferred

Answer 31

Earnings or income that is not subject to federal income taxes until a later date.

Question 32

Tax-Deferred Annuity (TDA) plan

Answer 32

A TDA allows you to avoid paying income taxes on contributions until you retire

Question 33

Technical Analysis

Answer 33

Technical analysis is based on the idea that market trends and supply/demand exist in stocks which repeat.

Question 34

Treynor ratio

Answer 34

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

Question 35

Value averaging

Answer 35

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