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Glossary of investment terms Chapter 1

Glossary of investment terms Chapter 1

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Alpha – The amount of return expected from an investment from its inherent value.

Alternative Minimum Tax (AMT) – Federal tax, revamped by the Tax Reform Act of 1986, aimed at ensuring that wealthy individuals, trusts, estates and corporations pay at least some tax.

Annual report – The yearly audited record of a corporation or a mutual fund’s condition and performance that is distributed to shareholders.

Annualized – A procedure where figures covering a period of less than one year are extended to cover a 12-month period.

Annualized rate of return – The average annual return over a period of years, taking into account the effect of compounding. Annualized rate of return also can be called compound growth rate.

Appreciation – The increase in value of a financial asset.

Asset allocation – The process of dividing investments among cash, income and growth buckets to optimize the balance between risk and reward based on investment needs.

Asset class – Securities with similar features. The most common asset classes are stocks, bonds and cash equivalents.

Average maturity – For a bond fund, the average of the stated maturity dates of the debt securities in the portfolio. Also called average weighted maturity. In general, the longer the average maturity, the greater the fund’s sensitivity to interest-rate changes, which means greater price fluctuation. A shorter average maturity usually means a less sensitive – and consequently, less volatile – portfolio.