Asset Class
A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same laws and regulations. The two main asset classes are equities (stocks), and fixed-income (bonds).
Example: Asset classes are cash (money market), domestic bonds, international stocks, large cap stocks, and small cap stocks. Asset classes are used in the process of asset allocation to control the risk and return characteristics of a portfolio.
Average Annual Return
A percentage figure used when reporting the historical return, as the three-, five- and 10-year average returns of a mutual fund.
The Average Annual Return is the calculation of the simple mathematical mean of annual returns over a specified period of time. Computing for the Average Annual Return is quite simple. All one has to do is to add the annual rates and then divide it by the number of years where the rates were lifted. Thus, the formula is:
Average Annual Return = (sum of annual rates) / (No. of years)
To illustrate, if for the year 2000, the annual rate is 10 per cent, and then it becomes 5 per cent the following year, then the average annual return for those two years is 7.5 per cent. The computation for the Average Annual Return clearly shows that this is not a compounded rate of return. Rather you first have to calculate the annual return for each year individually (10, 5), then add each annual return together (10 + 5 = 15), then divide by the total number of years (15/2=7.5).
Annualized Returns
The returns an investment actually made, after compounding and volatility are considered. To calculate the annualized returns, first find the compound rate of return over the time period. Then, take the nth root (n being the number of years) of the compound returns.
Bond
A debt investment which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities.
Example: The indebted entity(issuer)bond that states the interest rate (coupon) that will be paid and when the loaned funds (bond principal) are to be returned (maturity date). Interest on bonds is usually paid every six months (semi-annually).
Fiduciary
The fiduciary duty is the duty to act in the client’s best interest. Fee only advisors are fiduciaries, but commissioned sales-people, who are often called advisors or planners, are not fiduciaries. They are required merely to sell products that are suitable for the client.
Inflation
The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.
Example: As inflation rises, every dollar will buy a smaller percentage of a good. For example, if the inflation rate is 2%, then a $1 pack of gum will cost $1.02 in a year. (investopedia.com)
Large Cap Stocks
“Cap” stands for “Capitalization”, so large cap stocks are the stocks of larger companies and tend to be less risky than small cap stocks.
Small Cap Stocks
“Cap” stands for “Capitalization”, so small cap stocks are the stocks of smaller companies and tend to be riskier than large cap stocks.
Standard Deviation
Is applied to the annual rate of return of an investment to measure the investment’s volatility. Standard deviation is also known as historical volatility and is used by investors as a gauge for the amount of expected volatility.
Stock
A type of security that signifies ownership in a corporation and represents a claim part of the corporation’s assets and earnings. Stocks are also known as equities.
Value Stocks
A value company is a distressed company. Value companies usually have a lot of debt, and often their earnings are very volatile. Also, Value companies are often companies in sectors or industries where the whole industry is considered either risky or to have very limited future prospects. Value stocks are riskier than “growth” stocks and as a result they have a higher expected return.