Alpha
Simply stated, alpha is often considered to represent the value that a portfolio manager adds to or subtracts from a fund's return.  A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%

Asset Allocation
An investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment horizon.

Basis Point (BPS)
A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security  The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points, and  0.01% = 1 basis point.  So, a bond whose yield increases from 5% to 5.5% is said to increase by 50 basis points; or interest rates that have risen 1% are said to have increased by 100 basis points

BETA
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.   A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.

Buy-Write
A trading strategy that consists of writing call options on an underlying position to generate income from option premiums. Because the options position is covered by the underlying position, the downside risk of writing the option is minimized.

Capital Asset Pricing Model (CAPM)
A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities.


 
The general idea behind CAPM is that investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk. This is calculated by taking a risk measure (beta) that compares the returns of the asset to the market over a period of time and to the market premium (Rm-rf).

Information Ratio
A measure of portfolio management's performance against risk and return relative to a benchmark or alternative measure.

Large Cap
A term used by the investment community to refer to companies with a market capitalization value of more than $10 billion. This is a abbreviation of the the term "large market capitalization."  Market capitalization is calculated by multiplying the number of a company's shares outstanding by its stock price per share.

Mid Cap
A company with a market capitalization between $2 and $10 billion, which is calculated by multiplying the number of a companies shares outstanding by its stock price. Mid cap is an abbreviation for the term "middle capitalization."

Modern Portfolio Theory (MPT)
A theory on how risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward.

Monte Carlo Simulation
A problem solving technique used to approximate the probability of certain outcomes by running multiple trial runs, called simulations, using random variables. 

Municipal Bond
A debt security issued by a state, municipality or county to finance its capital expenditures. Municipal bonds are exempt from federal taxes and from most state and local taxes, especially if you live in the state in which the bond is issued.

Price-Earnings Ratio (P/E Ratio)
The P/E is sometimes referred to as the "multiple," because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of  current earnings.

R-Squared
A statistical measure that represents the percentage of a fund or security's movements that can be explained by movements in a benchmark index. For fixed-income securities, the benchmark is the T-bill. For equities, the benchmark is the S&P 500.

Sharpe Ratio
The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been.

Small Cap
Refers to stocks with a relatively small market capitalization. The definition of small cap can vary among brokerages, but generally it is a company with a market capitalization of between $300 million and $2 billion.

Standard Deviation
Standard deviation is a statistical measurement that sheds light on historical volatility. For example, a volatile stock will have a high standard deviation while the deviation of a stable blue chip stock will be lower. A large dispersion tells us how much the return on the fund is deviating from the expected normal returns. 

Style Drift
The divergence of a mutual fund from its stated investment style or objective. Style drift occurs as a result of intentional portfolio investing decisions by management, a change of the fund's management or, in the case of stocks, a company's growth.

Unified Managed Account (UMA)
A professionally managed private investment account that is rebalanced regularly and can encompass every investment vehicle (e.g. mutual funds, stocks, bonds and exchange traded funds) in an investor's portfolio, all in a single account.

Yield
The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment's cost, its current market value or its face value.

Yield Curve
A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year, ten-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.