Glo=
ssary
of Investment Terms
![](3D"investmenttermglossary_files/image001.gif")
ACTIVE MANAGEMENT
A portf=
olio
technique that takes explicit bets away from the index (therefore adding ri=
sk),
with the objective of outperforming the index and adding additional
investment return known as alpha. (See also: Alpha)
ALPHA
A measu=
re of risk-adjusted
performance with regard to a specified market. A positive alpha is the extra
return awarded to the investor for taking a risk instead of accepting the
market return. It is the abnormal rate of return in excess of what would be
predicted by an equilibrium model. For example, an alpha of 1.0 means the f=
und
outperformed the specified market by 1.0% on a beta-adjusted basis. (See al=
so:
Beta)
BACK-TESTED INDEX DATA
Histori=
cal
index values for dates prior to an index's introduction. The values are hyp=
othetical
and provide an indication of how an index might have performed in the past =
if
it had existed. Also known as back-cast data or synthetic history. (See als=
o:
Index History)
BASE DATE
The dat=
e at
which an index's base value is set.
BASE VALUE
The ini=
tial
value with which an index is calculated at a particular starting date or ba=
se
date.
BENCHMARK INDEX
An inde=
x used
as a basis for comparison in measurement of the performance of an
investment.
BETA
A measu=
re of
volatility in comparison to the market as a whole. It measures risk in rela=
tion
to the market or to an alternative benchmark. For example, a beta of 1.5 me=
ans
that returns are expected to move 1.5 times the market's returns. Beta is
referred to as an index of the systematic risk due to general market condit=
ions
that cannot be diversified away. A beta of 1 indicates that price will move
with the market. A beta greater than 1 indicates that price will be more
volatile than the market. A beta less than 1 means that it will be less
volatile than the market.
CLOSED INDEX FUND
A fund =
whose
investment company issues a fixed number of shares in a portfolio of
securities. The shares are traded in the market just like common stock.
CORRELATION
Statist= ical measure of the degree to which the movements of two variables are related.<= o:p>
DIVISOR
A place=
holder
that serves as the only link to the original base period value of an index.=
The
divisor keeps the index comparable over time and is the manipulation point =
for
all index adjustments.
EFFICIENT-MARKET THEORY
The the=
ory
postulating that market prices reflect the knowledge and expectations of all
investors. It asserts that any new development is instantaneously pric=
ed
into a security, thus making it impossible to beat the market consistently.=
ENHANCED INDEX FUND
An inde= x fund designed to generally track an index but also to outperform it through the = use of futures, trading strategy, capital gains management, and other methods.<= o:p>
EXCHANGE-TRADED FUND (ETF)
A secur=
ity that
tracks an index and represents a basket of securities like an index fu=
nd.
However, it trades like a stock on an exchange, thus experiencing price cha=
nges
throughout the day as it gets bought and sold. ETFs generally have lower
expense ratios and experience greater tax efficiency. By owning an ETF,
you get the diversification of an index fund as well as the right to sell
short, buy on margin, and purchase as little as one share. Some common ETFs=
are
the Dow Jones Diamonds (DIA), which tracks the Dow Jones Industrial Average;
the Nasdaq-l00 Index Tracking Stock (QQQ), which tracks the Nasdaq-l00; and=
the
S&P Depositary Receipts (SPY), which tracks the S&P 50O.
EXPENSE RATIO
The per=
centage
of assets that are used to operate a fund. These include expenses such as
management fees, advisory fees, and overhead costs. The expense ratio does =
not
include brokerage costs for trading the portfolio.
FLOAT-ADJUSTED SHARES
The num=
ber of
shares actually available for purchase by the public on open markets. It is
calculated by subtracting restricted shares—such as those held by com=
pany
insiders—from outstanding shares.
INDEX
A stati=
stical
measure of change in an economy or a securities market. In the case of
financial markets, an index essentially measures a particular market o=
r a
portion of it.
INDEX COMMITTEE
A group=
of
people responsible for periodically reviewing the components, methodology,
goals, and so on of a given index. Not all indexes are governed by a commit=
tee;
many are instead maintained based on a quantitative set of rules.
INDEX FUND
A portf=
olio of
investments that closely reflects the composition of an index in order=
to
mirror its performance.
INDEX HISTORY
Histori=
cal
closing values of an index, typically available either daily or monthly. (S=
ee
also: Back-Tested Index Data)
INDEXING
An inve=
stment
strategy that aims to replicate the performance of a market or market segme=
nt
by using an index as a benchmark.
INDEX METHODOLOGY
A body =
of
practices, procedures, and rules used in creating and maintaining an index.
Typically, an index's methodology specifies the index universe from which
components are selected, the criteria by which an index's components are
selected, and practices such as weighting procedures, how the index is
calculated, how often is it calculated, and how often it is reviewed.
INDEX TURNOVER
The per=
centage
of an index's components that change as the result of a periodic composition
review. Can be calculated based on component number or market capitalizatio=
n.
INDEX UNIVERSE
The poo=
l of
securities from which an index draws its components.
INDUSTRY CLASSIFICATION SYSTEM
A syste=
m by
which securities are identified and grouped by their respective industry
sectors. Typically includes several tiers that range from very broad to very
specific groupings.
MARKET CAPITALIZATION
A measu=
re of
the size and value of a corporation, security, fund, or index as determined=
by
the market price of its issues and outstanding common stock. Market
capitalization is calculated as the product of market price and shares
outstanding =3D (stock price) x (shares outstanding). Float-adjusted market
capitalization is calculated by substituting shares outstanding with
float-adjusted shares outstanding.
MARKET COVERAGE
A measu=
re of
the degree to which an index includes all of the underlying securities in t=
he
market or market segment that that index represents. Market coverage is
generally expressed as a percentage and is calculated based on market
capitalization.
PASSIVE MANAGEMENT
An inve=
stment
strategy that mirrors a market index and does not attempt to beat the marke=
t.
Also known as passive investing or a passive strategy.