FTIP key terms

Risk that affects the entire market or a broad asset class, such as changes in interest rates, inflation, or recessions. It cannot be eliminated through diversification, so investors expect compensation for bearing it.

Risk specific to a single company or industry, such as a product recall or management change. Because it can be reduced by holding many securities, the market generally does not reward it with extra expected return.

A measure of how much a security or portfolio tends to move when the overall market moves. A beta of 1.2 suggests it is about 20% more volatile than the market; a beta of 0.8 suggests about 20% less.

A statistical measure of how widely returns vary around their average. Higher values indicate greater volatility and uncertainty, and it is commonly used as a measure of total risk.

A risk-adjusted performance measure calculated as the excess return above the risk-free rate divided by the investment's standard deviation. It shows how much return was earned per unit of total risk taken.

A model that estimates the expected return of an asset as the risk-free rate plus a risk premium based on its beta. It assumes investors are compensated only for systematic risk.

The return on an investment considered to have no default risk, typically approximated by a short-term government security. It serves as the baseline against which risky investments are compared.

The interest rate used to convert future cash flows into a present value. It reflects the time value of money plus a premium for the risk of receiving those cash flows.

The current worth of a future sum of money or stream of cash flows, given a specified rate of return. It allows comparison of cash flows occurring at different points in time.

The difference between the present value of expected cash inflows and the present value of cash outflows. A positive NPV suggests an investment adds value at the chosen discount rate.

The discount rate at which an investment's net present value equals zero. It represents the annualized compound return expected from a series of cash flows.

A measure of a bond's price sensitivity to changes in interest rates, expressed in years. For a 1% change in yield, price changes by roughly duration percent in the opposite direction.

A measure of how a bond's duration changes as interest rates change. It improves price estimates by capturing the curved relationship between bond prices and yields.

The annualized return an investor would earn by holding a bond to maturity and reinvesting all coupon payments at that same yield. It reflects the bond's current price, coupon, and time to maturity.

The difference in yield between a risky bond and a comparable government bond. It compensates investors for default risk, liquidity risk, and other credit concerns.

An independent agency's assessment of a borrower's ability and willingness to repay debt. Ratings range from high-quality investment grade to speculative, and affect borrowing costs.

Spreading investments across different assets, sectors, or regions to reduce the impact of any single holding's poor performance. It lowers unsystematic risk but cannot remove systematic risk.

A statistical measure between -1 and +1 of how closely two investments' returns move together. Lower or negative correlation between holdings improves the risk-reduction benefit of diversification.

The process of dividing a portfolio among broad asset classes such as stocks, bonds, and cash. It is a primary driver of a portfolio's long-term risk and return characteristics.

A long-term target mix of asset classes based on an investor's goals, risk tolerance, and time horizon. It is typically reviewed periodically rather than changed in response to short-term market moves.

The process of buying and selling holdings to restore a portfolio to its target asset allocation after market movements have shifted the weights. It helps control risk and enforces a disciplined approach.

A written document that sets out an investor's objectives, constraints, risk tolerance, and guidelines for managing the portfolio. It provides a framework for consistent decisions and communication with clients.

An investor's willingness and financial ability to accept fluctuations in portfolio value in pursuit of higher returns. It combines psychological attitude with capacity to bear losses.

The length of time over which an investor plans to hold assets before needing the money. Longer horizons generally permit greater exposure to volatile assets such as equities.

The standard requiring that an investment recommendation be consistent with a client's objectives, financial situation, risk tolerance, and needs. It focuses on whether the product fits the particular client.

A legal obligation to act in the best interests of a client, placing the client's interests ahead of one's own. It includes duties of loyalty, care, and full disclosure of conflicts.

The process of collecting and verifying information about a client's identity, financial situation, and investment objectives. It supports suitability assessments and helps prevent money laundering and fraud.

Laws, regulations, and procedures designed to prevent criminals from disguising the proceeds of illegal activity as legitimate funds. Financial firms must monitor transactions and report suspicious activity.

A situation in which a person or firm has competing interests that could compromise objectivity or loyalty to a client. Proper handling requires disclosure, avoidance, or management of the conflict.

A set of principles and standards of conduct that guides professional behavior and decision-making. It typically emphasizes integrity, objectivity, competence, confidentiality, and professionalism.

Buying or selling securities while in possession of material, nonpublic information, or communicating such information to others who trade. It is illegal in most jurisdictions and undermines market fairness.

Information that could affect an investment's price and is not yet available to the general public. Trading or tipping others on such information is generally prohibited.

The theory that asset prices quickly incorporate all available information, making consistent excess returns from analysis difficult. Its weak, semi-strong, and strong forms differ in the information assumed to be reflected.

The portion of an investment's return not explained by its exposure to the market. It is often used as a measure of a manager's value added above a benchmark.

An investment approach that seeks to outperform a benchmark through security selection, market timing, or other deliberate decisions. It typically involves higher costs and requires skill to succeed consistently.

A strategy that aims to match the return of a market index rather than beat it, often through index funds or exchange-traded funds. It generally offers lower costs and greater tax efficiency.

The annual fee charged by a fund, expressed as a percentage of assets under management. It covers management, administrative, and operating costs and directly reduces investor returns.

The value of a fund's assets minus its liabilities, divided by the number of shares outstanding. It represents the per-share price at which open-end fund shares are bought and sold.

A fund that holds a basket of securities and trades on an exchange like a stock throughout the day. It typically tracks an index and combines diversification with intraday liquidity.