APMA key terms

A written document that sets a client's return objective, risk tolerance, time horizon, liquidity needs, tax situation, legal constraints, and unique circumstances, and the rules for managing the portfolio in line with them.

The degree of variability in returns, and the chance of loss, that an investor is both financially able and psychologically willing to accept while pursuing objectives.

An investor's reluctance to accept additional uncertainty in returns; a more risk-averse investor demands a larger expected return premium to hold riskier assets.

The length of time over which an investor's money will be invested before it is needed; longer horizons generally allow more equity exposure and more tolerance for short-term volatility.

The amount of cash or readily sellable assets an investor must keep available to meet anticipated or emergency spending without disrupting the long-term portfolio strategy.

Dividing a portfolio among broad asset classes such as cash, bonds, equities, and real assets, usually in proportions chosen to balance expected return against risk.

The long-term target mix of asset classes chosen to fit an investor's objectives and constraints; it is the benchmark against which tactical moves and manager results are judged.

Short-term, deliberate deviations from the strategic mix, made to exploit expected relative performance among asset classes, sectors, or markets.

Periodically buying and selling to restore a portfolio's asset weights to their target levels after market moves have pushed them away.

Spreading money across assets whose returns do not move in lockstep, so that losses in one holding are partly offset by gains or stability in others.

A measure from -1 to +1 of how closely two assets' returns move together; lower correlation between holdings produces greater diversification benefit for a given level of risk.

A measure of how two assets' returns vary jointly; it feeds directly into portfolio variance calculations and captures both the size and direction of their co-movement.

Risk from broad market or economic forces that affects nearly all securities and cannot be removed by diversification, also called market risk.

Risk specific to a single company or industry, such as a product failure or lawsuit; it can be largely eliminated by holding a diversified portfolio.

A measure of a security's or portfolio's sensitivity to movements in the overall market; a beta of 1 means it tends to move with the market, above 1 means more volatile.

A model stating that expected return equals the risk-free rate plus beta times the market risk premium, so only systematic risk is compensated.

The return on a default-free investment, typically a short-term government security, used as the base rate from which risk premiums are added.

The extra expected return investors demand for holding a risky asset instead of a risk-free one; it compensates for bearing uncertainty.

A graph of expected return versus beta under CAPM; assets above the line appear undervalued for their risk, assets below it appear overvalued.

The set of portfolios offering the highest expected return for each level of risk; portfolios below it are inefficient because more return is available for the same risk.

The single point on the efficient frontier that best matches a particular investor's risk aversion, found where the highest attainable indifference curve touches the frontier.

A formula that scores the satisfaction an investor gets from a given risk-and-return combination, letting analysts rank portfolios for that investor.

A statistical measure of the dispersion of a portfolio's returns; it depends on each holding's variance and weight plus the covariances between every pair of holdings.

The square root of variance, expressing how widely returns scatter around their average; it is the most common measure of total portfolio risk.

The tendency of an asset's price or return to fluctuate over time, usually quantified by standard deviation or variance of returns.

An estimate of the largest loss a portfolio is likely to suffer over a stated period at a stated confidence level, such as a one-day 95% VaR.

Risk measured only from losses below a target or minimum acceptable return, rather than from all fluctuations in returns.

A strategy in which the manager deliberately deviates from a benchmark through security selection, weighting, or timing in an effort to outperform it.

A strategy that seeks to match a market index's return by holding the index constituents or a representative sample, with minimal trading and low costs.

A pooled fund built to replicate the performance of a specified market index, typically charging low fees because it requires little research or trading.

A style that buys companies expected to grow earnings or revenue faster than average, often accepting high valuations in exchange for that growth.

A style that buys stocks trading below their estimated intrinsic worth, using measures such as low price-to-earnings or price-to-book ratios.

A grid that classifies investments by size (large, mid, small) and by style (value, blend, growth), used to compare a portfolio's positioning with its benchmark.

Attempting to move money in and out of markets or asset classes in anticipation of price changes, typically with poor long-run results after costs.

A standard index or reference portfolio against which an investment's performance and risk are measured to judge whether the manager added value.

A custom benchmark built from the strategic asset allocation's index weights, used to separate the effects of policy choices from active management decisions.

The standard deviation of the difference between a portfolio's returns and its benchmark's returns; it gauges how closely the portfolio follows the benchmark.

The portion of return not explained by exposure to the benchmark or market, often interpreted as the value added or lost by active management.

Excess return over the benchmark divided by tracking error; it measures how much active return a manager earns per unit of active risk taken.

Excess return over the risk-free rate divided by standard deviation of returns; it measures reward per unit of total risk.

Excess return over the risk-free rate divided by beta; it measures reward per unit of systematic risk and suits well-diversified portfolios.

Excess return over a target return divided by downside deviation; it penalizes only harmful volatility, not upside gains.

A return that chains subperiod growth rates to remove the effect of external cash flows, making it the standard for judging manager performance.

A return that reflects the size and timing of an investor's deposits and withdrawals, essentially the internal rate of return on the account.

Breaking down a portfolio's performance relative to a benchmark into sources such as asset allocation, security selection, and interaction effects.

A fund's annual operating costs, including management fees and administration, expressed as a percentage of average net assets and deducted from returns.

The costs of trading, including commissions, bid-ask spreads, and market impact, which reduce net returns and rise with more frequent trading.

The rate at which a portfolio's holdings are replaced over a period; high turnover usually means higher trading costs and potentially greater tax liability.

Managing a portfolio so that taxes on dividends, interest, and realized gains are minimized, for example by holding assets in the most suitable account type.