RFP Module 6 key terms

The principle that a sum of money available today is worth more than the same sum received later, because it can be invested and earn a return in the interim.

The current worth of a future cash flow or stream of payments, calculated by reducing each amount using a discount rate that reflects time and risk.

The amount a present sum will grow to after a specified period when compounded at a given interest or growth rate.

The rate used to convert future cash flows into present value; it typically combines a risk-free benchmark with a premium for the risk of the cash flows.

The sum of all discounted future cash inflows minus outflows for a project; a positive result suggests the project adds value at the chosen discount rate.

The discount rate at which a project's net present value equals zero, representing the annualized return the cash flows are expected to generate.

The process by which earnings are reinvested so that subsequent periods earn returns on both the original principal and previously accumulated interest.

A sustained rise in the general price level, which erodes purchasing power and must be accounted for when projecting long-term income and expenses.

An investment return adjusted for inflation, showing the actual increase in purchasing power rather than the nominal percentage change in value.

The stated percentage gain on an investment before any adjustment for inflation, taxes, or fees are applied.

A client's capacity and willingness to endure fluctuations in portfolio value in pursuit of higher expected returns, shaped by finances and psychology.

The objective financial ability of a household to absorb losses without jeopardizing essential goals, distinct from the client's emotional willingness to take risk.

The division of a portfolio among asset classes such as equities, bonds, and cash, which is the primary driver of long-term return and volatility.

Spreading investments across assets, sectors, and geographies so that poor performance in any single holding has a limited effect on the whole portfolio.

A statistical measure from -1 to +1 describing how closely two assets move together; lower correlation between holdings improves diversification benefits.

The degree to which an investment's returns fluctuate over time, commonly measured by standard deviation and used as a proxy for investment risk.

A statistical measure of the dispersion of returns around their average, indicating how widely an investment's outcomes may vary from expectations.

Market-wide risk that affects all securities and cannot be eliminated through diversification, such as interest rate shifts or broad economic downturns.

A measure of how sensitive an investment's returns are to movements in the overall market; a beta above one implies greater volatility than the market.

The extra expected return investors demand for holding a risky asset instead of a risk-free one, compensating them for accepting uncertainty.

The ease and speed with which an asset can be converted to cash at a fair price without causing a significant decline in its value.

Readily accessible cash reserves set aside to cover unexpected expenses or income loss, typically several months of essential spending.

A personal financial document listing all sources of income and all outflows over a period, revealing surplus or deficit available for saving and investing.

A snapshot listing a household's assets and liabilities at a point in time, with the difference between them representing total net worth.

A forward-looking plan that allocates expected income across spending, saving, and debt repayment categories to guide financial decisions.

A specific, time-bound objective such as retirement or a home purchase, defined by target amount, deadline, and priority among competing needs.

The length of time before a financial goal must be funded, which strongly influences appropriate asset allocation and acceptable volatility.

How often interest is calculated and added to principal within a year; more frequent compounding produces a higher effective annual return.

The true annual return after accounting for compounding within the year, allowing fair comparison of products that quote different compounding frequencies.

Periodically adjusting portfolio holdings back to target weights after market movements have shifted the allocation away from the intended mix.

The value of the best alternative forgone when a choice is made, such as the returns lost by holding cash instead of investing it.

A documented summary combining a client's risk tolerance, risk capacity, time horizon, and goals that guides recommendations for portfolio construction.