30-day SEC Yield
SEC yield is a standardized yield calculation for funds developed by the U.S. Securities and Exchange Commission. The SEC Yield calculation is based on a 30-day period that ended on the last day of the previous month. It represents the hypothetical income an investor would earn from the fund over a 12-month period if the fund continued earning at the same rate as the 30-day calculation period. SEC Yield is not a perfect indicator of future performance; a fund’s actual yield may differ from its SEC Yield.
Alpha
A measure of the difference between a portfolio’s actual returns and its expected performance, given its level of risk as measured by beta. A positive Alpha figure indicates the portfolio has performed better than its beta would predict.
Annualized Net Performance or Compound Annual Rate of Return (ROR)
Annualized net total return or compound annual rate of return is the geometric average amount of money an investment earns each year over a given period net of expenses. The annualized return formula is calculated as a geometric average to show what an investor would earn over some time if the annual return were compounded.
Average Coupon or Weighted Coupon
Average coupon is the average rate of coupons for a group of bonds in a portfolio, weighted by the size of each bond’s holding in the portfolio. It’s a way to determine if a fund has more high-coupon or low-coupon bonds.
Average Credit Rating
An average credit rating is a calculation of a portfolio’s overall creditworthiness, which is based on the weighted average of each bond’s credit rating in the portfolio. A credit rating is an independent assessment of the ability of a corporation or a government to repay a debt or fixed income obligation, either in general terms or regarding a specific financial obligation.
Average Duration
Average duration is a statistic that measures a fund’s interest-rate sensitivity. It is calculated as the weighted average of the durations of a portfolio’s underlying bonds or derivatives market exposures. A longer duration means a fund’s price is more sensitive to interest rate shifts.
Beta
Beta is a measure of a stock’s volatility in relation to the overall market. By definition, the market, such as the S&P 500 Index, has a beta of 1.0. A security with a beta of greater than 1.0 means the security is more volatile than the market, while a beta less than 1.0 means it’s less volatile. A negative beta means the security moves in the opposite direction of the market.
Call Option
A call option is a contract that gives the buyer the right but not the obligation to buy a specific amount of stock or other underlying security at a predetermined price (strike price) within a specified time frame. Investors purchase call options when they think a stock or underlying asset will appreciate in value.
Correlation
Correlation, in the finance and investment industries, is a statistic that measures the degree to which two securities move in relation to each other. Correlations are used in advanced portfolio management, computed as the correlation coefficient, which has a value that must fall between -1.0 and +1.0.
Covered Call Strategy
The term covered call refers to a financial transaction in which an investor sells call options on a security while owning an equivalent amount of the same underlying security. Writing or selling the call option is a strategy to generate an income stream. The investor’s concurrent long position in the security “covers” the call option because it means the investor can deliver the underlying security if the buyer chooses to exercise the call option.
Credit Risk
Credit risk is the possibility of a loss that occurs when a borrower or counterparty fails to fulfill their obligations as agreed upon.
Cumulative Excess Return/Performance
Cumulative excess return is the difference between the cumulative return of a portfolio and the cumulative return of a benchmark. It measures the total amount of returns an investment generates above what it would have generated if it had simply tracked its benchmark.
Cumulative Return
Cumulative return is the total gain or loss of an investment over a specific period of time and is expressed as a percentage calculated as the difference between the ending and starting value divided by the starting value.
Derivative Instruments
The term “derivative” refers to a type of financial contract, such as options or futures, whose value is dependent on an underlying asset, a group of assets, or a benchmark. Derivatives are agreements set between two or more parties that can be traded on an exchange or over the counter (OTC).
Digital Signal Processing (DSP)
Digital signal processing (DSP) is the use of digital processing by computers or more specialized digital signal processors to convert or transform data in a way that allows investors to see meaningful information that may not be possible via direct observation.
Downside Capture Ratio
The downside capture ratio is used to evaluate how well an investment manager performed relative to an index during periods when that index has dropped. The ratio is calculated by dividing the manager’s average return in the index’s down months by the average return of the index in its down months and multiplying that factor by 100.
Downside Deviation
Downside deviation is a measure of an investment’s downside risk, or how much it can lose. It’s a variation of standard deviation that only focuses on negative returns, or returns that fall below a minimum acceptable return (MAR).
Downside Risk
Downside risk is an estimation of a security’s potential loss in value if market conditions precipitate a decline in that security’s price. Depending on the measure used, downside risk explains a worst-case scenario for an investment and indicates how much the investor stands to lose. Downside risk measures are considered one-sided tests since the profit potential is not considered.
Duration Diversification
Bond duration diversification involves using bonds with different durations to reduce interest-rate risk and improve portfolio diversification.
Duration Risk
Bond duration risk is the likelihood that a bond’s price will change due to interest rate fluctuations. A bond’s duration is a measure of how sensitive its price is to interest rate changes, and a higher duration indicates a higher level of risk.
Exchange-Traded Funds (ETFs)
An exchange-traded fund (ETF) is a pooled investment security that can be bought and sold like an individual stock. ETFs can be structured to track anything from the price of a commodity to a large and diverse collection of securities.
Futures Contract
A futures contract is a legal agreement to buy or sell a particular commodity asset or security at a predetermined price at a specified time in the future. Futures contracts are standardized for quality and quantity to facilitate trading on a futures exchange.
Heat Map Timeline
A heat map is a two-dimensional representation of data in which various values are represented by colors. A simple heat map provides an immediate visual summary of information across two axes, allowing users to quickly grasp the most important or relevant data points. More elaborate heat maps allow the viewer to understand complex data sets.
Hedged Equity Strategy
A long equity strategy that has a hedge overlay that protects the long portfolio, usually by investing in options to hedge the long portfolio or to structure a defined outcome based on the long portfolio.
Kurtosis/Kurtosis of Returns
Kurtosis indicates how much the distribution of a dataset is spread out, particularly in the tails of the distribution. It is a statistical measure of how much data in a distribution resides in the outlier tails of a distribution relative to a normal (bell curve) distribution. As a financial risk measure of returns, kurtosis is used to indicate the likelihood of an investment producing extreme returns. If Kurtosis of returns is low, it indicates higher incidences of outlier tail returns. If Kurtosis of returns is high, it indicates that returns are more peaked with fewer tails.
Left Tail Events
Left tail risk, also known as tail risk, is the possibility of an asset or portfolio of assets experiencing an extremely negative performance due to a low-probability event with high impact, such as market dislocations and negative investor sentiment.
Leverage
Leverage refers to financial leverage, which is the use of borrowed money (debt) to finance the purchase of assets with the expectation that the gains from the assets will exceed the cost of borrowing.
Mean Reverting/Mean Reversion
Mean reversion is a financial theory that suggests asset prices will eventually return to their long-term average or mean. It’s based on the idea that asset prices and historical returns will gravitate towards a long-term average over time. Traders and investors use mean reversion as a timing strategy to buy or sell securities that have performed differently from their historical averages. The greater the deviation from the mean, the higher the likelihood that the asset’s price will be deferred in the future.
Model-Delivery Platforms
Platforms available to financial advisors that deliver investment strategies in a separately managed account format.
Options/Options Contract
An options contract is a financial agreement that gives a buyer the right but not the obligation to buy or sell a particular asset at a specific price within a set time period. Because the owner of an option is not obligated to buy the underlying asset, the owner – for the price of the option premium – has the right to buy the assets for a positive return but has no obligation to buy the asset for a loss (by letting the option expire unexercised).
Passive Index Investing
Passive investing, also known as passive management, is a long-term investment strategy that aims to grow wealth by buying and holding securities over time with the goal of matching and growing with the market, rather than trying to outperform it. Passive index investing involves purchasing mutual funds and ETFs which track market indexes.
Put Options
A put option is a contract that gives the buyer the right but not the obligation to sell a specific amount of stock or other underlying security at a predetermined price within a specified time frame. The predetermined price is called the strike price. Investors purchase put options when they think a stock or underlying asset will depreciate in value.
Right Tail Events
Right tail events are the possibility of an asset or portfolio of assets experiencing strong positive performance due to a low-probability event with high impact, such as positive economic factors or investor behavioral exuberance.
Risk Off Screening
Risk Off Screening is a term used in the RMI Strategy to indicate which investments are screened for the best yields given an environment when a majority of security prices are trending unfavorably. Screened securities in a risk-off environment are likely to be high-quality instruments or cash.
Risk On Screening
Risk On Screening is a term used in the RMI Strategy to indicate which investments are screened for the best yields given an environment when a majority of security prices are trending favorably. Screened securities in a risk on environment are likely to be a wider range of credits and duration instruments, such as high yield, preferred.
Risk-Adjusted Returns
Risk-adjusted returns are a way to measure an investment’s profitability while taking into account the risk involved. For example, the Sharpe Ratio and Sortino Ratio are measures of risk-adjusted return expressed as a ratio measuring how much extra return an investor is getting for each unit risk defined by the ratios. A higher Sharpe ratio or Sortino Ratio indicates a better return for the level of risk taken. Risk-adjusted return measures allow investors to compare returns while taking into account the level of risk associated with each and offering a more comprehensive picture of an investment’s performance compared to traditional return measures, such as absolute return or total return.
Risk Managed Strategy
Portfolio risk management is a process that involves identifying, assessing, measuring, and managing risks that could affect a portfolio. The goal of portfolio risk management is to minimize risk, maximize returns, and ensure the portfolio meets its goals. A risk-managed strategy is one that employs any combination of diversification, asset allocation/rotation, rebalancing, hedging, and risk budgeting in its investment process.
Sharpe Ratio
The Sharpe Ratio is a measure of risk-adjusted return expressed as a ratio measuring how much extra return an investor is getting for each unit of risk. It is calculated by subtracting the risk-free rate of return from the portfolio’s return, and then dividing by the portfolio’s standard deviation. A higher Sharpe ratio indicates a better investment return for the level of risk taken.
Skew/Return Skew
Skewness is a measure of the asymmetry of a distribution. A distribution is asymmetrical when its left and right sides are not mirror images. Skewness is a useful tool in portfolio analysis because it can help investors understand the distribution of returns for a group of investments. A positively skewed distribution of returns means that the tails are more pronounced on the right side (positive returns) than on the left side (negative returns), generally indicating that a portfolio has a higher chance of larger positive right-tail returns and smaller negative left-tail returns.
Sortino Ratio
The Sortino ratio is a variation of the Sharpe ratio that differentiates harmful volatility from total overall volatility to determine how much an investor is getting from each unit of downside risk. It is calculated by subtracting the risk-free rate of return from the portfolio’s return, and then dividing by the portfolio’s downside deviation. A higher Sortino ratio indicates a better investment return for the level of downside risk taken.
Standard Deviation
Standard deviation is a statistical measurement of how far a variable, such as an investment’s return, moves above or below its average (mean) return. In investing, standard deviation is a statistical measurement that shows how much an investment’s returns vary on average from its mean return. It’s a common way to judge an investment’s risk and volatility and to predict its performance. A higher standard deviation means an investment is riskier and more volatile, with a greater chance of larger price swings.
Static Hedging/Static Option Hedge/Static Option Exposure
Static hedging is a risk management technique that involves establishing a hedging position and then leaving it unchanged over the course of the hedge, regardless of price movements. The goal of static hedging is to match a risky investment position as closely as possible with a hedging vehicle. A static option hedge is when options are used as the hedging vehicle in static hedging.
Tactical Hedge/Tactical Risk Management
A tactical hedge is taking an investment decision that addresses shorter-term market variables to protect a portfolio or to reduce the risk of losing money while executing a broader investment strategy. Tactical hedging, which responds to market conditions, is different than static hedging, which maintains a hedge on an ongoing basis.
Tactical Investing
Tactical investing is a short-term investment strategy that involves adjusting a portfolio based on market conditions, economic forecasts, or other factors. The goal of tactical investing is to improve a portfolio’s risk-reward profile, increase returns, or preserve capital. Tactical investing differs from strategic asset allocation, which involves maintaining a fixed asset mix over the long term. Tactical investing is more active, using discretionary or systematic methods, and involves shifting the composition of a portfolio based on perceived opportunities and risks.
Tactical Risk Management
Tactical risk management is the process of actively adjusting a portfolio to take advantage of short-term market opportunities, while also managing risk, by shifting assets between sectors, varying the percentage invested in the market, or making trades that hedge the portfolio.
Total Return
Total return is a measure of an investment’s overall performance over a period of time, and is calculated by accounting for all changes in its value. The total return is the total of all income and appreciation from an investment over a given period, including interest, dividends, capital gains, and realized distributions.
Track Record
Track record is the actual past historical performance of an investment strategy portfolio or fund.
Tracking Errors
Tracking error is the difference between the performance of a portfolio (or position) and the performance of a benchmark. It shows an investment’s consistency versus a benchmark over a given period of time, and is reported as the standard deviation of the monthly differences between the investment and benchmark returns.
Uncorrelated
An asset that isn’t correlated with another. This means that the value of the two assets doesn’t follow the same ups and downs.
Upside Capture Ratio
The upside capture ratio is used to evaluate how well an investment manager performed relative to an index during periods when that index has risen. The ratio is calculated by dividing the manager’s average return in the index’s up months by the average return of the index in its up months and multiplying that factor by 100.
Upside Deviation
Upside deviation is a measure of an investment’s upside volatility, or how much it can gain. It’s a variation of standard deviation that only focuses on positive returns, or returns that fall above a minimum acceptable return (MAR) or a benchmark return.
Upside/Downside Asymmetry
Upside/downside asymmetry or upside/downside capture asymmetry is a measure of how well an investment performs when the market is going up compared to when it’s going down in relation to its benchmark. It is calculated using the Capture Ratio, which is an investment’s Upside Capture Ratio divided by its Downside Capture Ratio. A high overall Capture Ratio indicates strong upside/downside asymmetry, which can be an indication of a portfolio’s ability to avoid market losses and participate in market gains.
Volatility
Volatility is a statistical measure of the dispersion of returns for a given security, portfolio strategy, or market index. It is often measured from either the standard deviation or variance between those returns. In most cases, the higher the volatility, the riskier the security.
Yield
Yield is the income generated by an investment relative to its price, typically expressed as a percentage. It’s a measure of how much money investors receive from security over a period of time, such as interest or dividends. Yield is often based on the security’s market value or the initial investment. Yield can be calculated for any timeframe, but investors typically look at annual yield.
