IAR key terms

The total market value of all final goods and services produced within a country's borders in a given period. It is the broadest headline measure of economic output and growth used to gauge business conditions.

The recurring pattern of expansion and contraction in aggregate economic activity, typically moving through expansion, peak, contraction, and trough. Its stage strongly influences earnings expectations and appropriate portfolio positioning.

Statistics that tend to change before the overall economy does, such as building permits, new unemployment claims, and stock prices. Analysts use them to anticipate turning points rather than confirm past trends.

A sustained rise in the general price level, eroding purchasing power. The Consumer Price Index tracks household prices while the Producer Price Index tracks prices at earlier stages of production; both guide interest-rate expectations.

The interest rate at which depository institutions lend reserve balances to each other overnight, targeted by the central bank. Changes ripple through short-term rates, borrowing costs, and equity valuations.

A graph plotting yields of bonds of equal credit quality against their maturities. Its slope signals market expectations for growth and rates; an inverted curve has historically preceded recessions.

Investment return adjusted for inflation, approximated as nominal return minus the inflation rate. It reflects actual change in purchasing power and is the figure relevant to long-term goals.

The principle that a sum available today is worth more than the same sum in the future because it can be invested and earn a return. It underlies present-value and future-value calculations for goals.

The constant yearly rate at which an investment would have grown from its starting value to its ending value, smoothing out volatility. It allows comparison of performance across differing time horizons.

Actions by a central bank to influence money supply and credit conditions, chiefly through interest-rate targets and asset purchases. It affects inflation, employment, and the discount rate applied to future cash flows.

Government use of taxation and spending to influence the economy. Expansionary policy can stimulate demand while contractionary policy restrains it, with direct effects on certain sectors and on bond supply.

A statistical measure of how widely an investment's returns vary around their average, commonly used as a proxy for total risk. Higher values indicate greater dispersion and less predictability of outcomes.

A measure of how sensitive a security's returns are to movements in the overall market, where 1.0 matches the market. It captures systematic risk that cannot be diversified away.

A number from -1 to +1 describing how closely two variables move together. Low or negative correlation between assets is the foundation of diversification benefits in portfolio construction.

A framework stating expected return equals the risk-free rate plus beta times the market risk premium. It links required return to systematic risk and is used to judge whether a security is fairly priced.

Excess return above the risk-free rate divided by standard deviation. It expresses return earned per unit of total risk, allowing comparison of portfolios with different volatility levels.

The set of portfolios offering the highest expected return for each level of risk, given a universe of assets. Portfolios below the frontier are inefficient because better return is available for equal risk.

An approach holding that investors should build portfolios by balancing expected return against risk across many assets, using diversification and correlation rather than judging holdings in isolation.

A bond's weighted average time to receive its cash flows, also used to estimate price sensitivity to a one percent change in interest rates. Longer duration means greater price volatility.

An independent assessment of an issuer's ability to meet principal and interest obligations, expressed on a letter scale. Ratings influence required yields and eligibility for many institutional portfolios.

A debt security rated in the upper rating tiers, generally from BBB- or Baa3 and above. It carries lower default risk than speculative bonds but still exposes holders to interest-rate and credit-spread risk.

A bond rated below investment grade, offering higher yields to compensate for greater default risk. Its price tends to behave more like equity and to be sensitive to the issuer's business prospects.

For a mutual fund or exchange-traded fund, total assets minus liabilities divided by shares outstanding, usually computed once daily. It is the price at which open-end fund shares are bought and redeemed.

A pooled investment that continuously issues and redeems shares at net asset value, priced once per trading day. It offers liquidity and professional management but may carry sales loads and expense ratios.

A pooled investment that raises a fixed amount of capital in an initial offering and then trades on an exchange like a stock. Its market price may differ from net asset value, trading at a premium or discount.

A pooled portfolio whose shares trade intraday on an exchange and typically track an index. Creation and redemption by authorized participants keep market price close to net asset value.

The annual cost of running a fund, expressed as a percentage of average net assets and deducted before returns are reported. Lower ratios leave more of the gross return with the investor.

An agreement giving the buyer the right, but not the obligation, to buy or sell an underlying asset at a set price before expiration. Buyers pay a premium; writers accept obligation for that premium.

A financial instrument whose value is derived from an underlying asset, rate, or index. Derivatives are used to hedge risk, gain exposure efficiently, or speculate, and can add leverage.

A written document recording a client's objectives, constraints, risk tolerance, and guidelines for managing the portfolio. It provides a benchmark for evaluating decisions and discourages reactive changes.

A client's willingness and financial ability to accept variability in portfolio value in pursuit of goals. It combines psychological attitude with capacity to absorb losses and drives appropriate asset mix.

The division of a portfolio among asset classes such as stocks, bonds, and cash. Research attributes most return variability over time to this decision rather than to individual security selection.

Investing a fixed sum at regular intervals regardless of price, so more shares are bought when prices are low. It reduces timing risk but does not guarantee profit or protect against declining markets.

Periodically returning a portfolio to its target asset mix by selling overweight holdings and buying underweight ones. It restores intended risk and enforces a disciplined sell-high, buy-low behavior.

The obligation to ensure a recommendation fits a client's objectives, financial situation, risk tolerance, and needs before it is made. It requires knowing the customer and documenting the basis for advice.

A legal obligation to act solely in another party's best interest, placing the client's interest ahead of the adviser's own. It encompasses loyalty, care, disclosure of conflicts, and best execution.

A situation where an adviser's personal or firm interest could improperly influence advice, such as commissions or proprietary products. It must be disclosed and managed, or avoided where it cannot be mitigated.

Buying or selling securities while in possession of material, nonpublic information, or communicating it to others who trade. It breaches duties of trust and is prohibited regardless of profit or loss.

Facts a reasonable investor would consider important in deciding to buy or sell a security. Trading on such information before it is public can constitute prohibited insider trading.

Conduct intended to deceive by artificially controlling or distorting a security's price or trading volume, such as wash trades or spreading false rumors. It is a prohibited unethical business practice.

The process of collecting and verifying a client's identity, financial profile, objectives, and risk tolerance before making recommendations or opening accounts. It underpins suitability and anti-money-laundering controls.

Policies and procedures to detect and report attempts to disguise the proceeds of crime through the financial system. Firms must verify identity, monitor transactions, and file suspicious activity reports.