Bond

A debt investment in which the investor lends money to an entity (usually a company or government) and receives interest and principal payments.

Because individual bonds do not have tickers, Portfolio Optimizer Pro™ does not allow individual bonds in the portfolios that it analyzes.

Commodity

A basic good used in commerce that is interchangeable with other commodities of the same type.  Examples of commodities are oil, precious metals, wheat, and beef.

Correlation

A measure of how changes in one statistic compare to changes in another statistic; correlations range from a low of -1 to a high of +1.  A correlation of +1 means that the statistics move up or down together; a correlation of -1 means that one moves up when the other moves down.  Values between the extremes indicate that the statistics move in the same direction sometimes and in opposite directions sometimes: more often in the same direction for positive correlations, more often in opposite directions for negative correlations.

Portfolio Optimizer Pro™ looks at the correlations of monthly returns for the securities in a portfolio.  For a well-diversified portfolio, the correlations should be low: the lower the correlations between the securities’ returns, the lower the risk of portfolio.

Dividend

A payment of money by a corporation to the owners of its stock, usually from the operating profits of the corporation.

Efficient

adj. Describing an investment or portfolio with the minimum risk for a given return or the maximum return for a given risk.

Efficient Frontier

For a given risk measure – variance, lower semivariance, or semivariance below a target rate – a given set of securities, and a given period of time over which returns are calculated, the efficient frontier is the set of all portfolios comprising those securities which have the greatest average return for a given level of risk, or the lowest risk for a given average return.

ETF

Exchange-traded fund.

Exchange

A market in which securities, commodities, options or futures are traded by investors.

Exchange-Traded Fund – ETF

A security that tracks an index, a commodity, or a collection of assets, and trades like a stock on an exchange.  An ETF is similar to a mutual fund; the primary difference is that the shares of a mutual fund can only be bought from and sold to the fund itself, whereas shares of an ETF are traded on an exchange.

Future

A security that obligates the owner to buy or sell an asset at a particular price on a particular date.  Also known as a futures contract.  A future differs from an option in that an option does not obligate the owner to perform, whereas a future does.  

Because their limited life makes it difficult to compute reliable correlations of monthly returns with other securities, Portfolio Optimizer Pro™ does not allow futures in the portfolios it analyzes.

Index

A number that measures changes in the economy or a securities market.  Examples of indices are the Dow Jones Industrial Average, the S&P 500 Index, and the Consumer Price Index.

Long

adj. Describing the position in a security that has been purchased, before that security is sold.  Opposite of short.

If an investor believes that the price of a security will increase, he may “go long” (purchase) that security with the intention of selling it later at a higher price, thus generating a profit.

Lower Semivariance

A statistical measure of how widely-dispersed a set of data is, but one that considers only the values below the average: it is computed the same way as the variance, but ignores the values above the average.

Margin

An amount of money from the proceeds of a short sale that must remain in a brokerage account until the security is repurchased, usually given as a percentage of the proceeds.  If you sell short 100 shares of stock and your broker requires a 60% margin, then 60% of the proceeds of the sale must remain in the brokerage account; you are free to use the other 40% any way you choose: to purchase other securities, for example.

Mutual Fund

An investment in a diversified collection of stocks, bonds, commodities, and other securities.  When you invest in a mutual fund you share ownership of the entire pool of securities that the fund owns.  A mutual fund is similar to an ETF; the primary difference is that the shares of the ETF trade on an exchange, whereas the shares of the mutual fund can only be bought from and sold to the fund itself.

Option

A security that gives the owner the right, but not the obligation, to buy (call option) or sell (put option) an asset at a particular price during a certain period of time (American option) or on a specific date (European option).  An option differs from a future in that a future obligates the owner to perform, whereas an option does not.

Because their limited life makes it difficult to compute reliable correlations of monthly returns with other securities, Portfolio Optimizer Pro™ does not allow options in the portfolios it analyzes.

Portfolio

A group of assets – e.g., stocks, bonds, commodities – owned by an investor.

Real Estate Investment Trust – REIT

A security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. 

Equity REITs invest directly in real property.  Mortgage REITs invest in real estate by purchasing mortgages.  Hybrid REITs invest directly in real property and also in mortgages.

REIT

Real Estate Investment Trust

Return

The profit or loss on an investment.  Returns are usually given as a percentage of the original investment; a positive return indicates a profit whereas a negative return indicates a loss.

Risk

The uncertainty of the (possible future) returns on an investment; risk is most commonly measured using the standard deviation of returns over some length of time, but other measures (e.g., lower semivariance, semivariance below a target rate) can be used as well.

Security

For the purposes of Portfolio Optimizer Pro™, a security is a stock, mutual fund, exchange-traded fund (ETF), or real estate investment trust (REIT) that can be bought or sold by the user.  Other securities include bonds, options, and futures.

Semivariance Below a Target Rate

A statistical measure of how widely-dispersed a set of data is, but one that considers only values below a given level.  It is computed similarly to variance: it takes each value below the target rate, subtracts the target rate, squares the difference, then averages all of those squares; values above the target rate are ignored.  Common target rates include 0% (giving a measure of the risk of losing value), the inflation rate (giving a measure of the risk of losing purchasing power), and the risk-free rate.

Short

v. To sell a security before you have purchased it, either by borrowing the security with the intention of replacing it later, or by selling with an agreement to deliver at a later date.

adj. Describing the position in a security that has been shorted, or sold short; opposite of long.

If an investor believes that the price of a security will decrease, he may sell it short (or “go short” or, simply, “short” the security) with the intention of purchasing it later at a lower price, thus generating a profit.

Standard Deviation

A statistical measure of how widely-dispersed a set of data is: the standard deviation is the square-root of the variance.  The reason for using the standard deviation instead of the variance is that the standard deviation has the same units as the data values, whereas the variance does not.

Stock

A share of ownership in a corporation.  If a corporation issues 1,000 shares of stock, each share represents ownership of 1/1000 of the corporation; if you own 150 shares, you own 150/1000 = 15% of the corporation.

A company can issue “preferred” stock and “common” stock, and can even issue various classes of preferred stock or common stock.  Owners of preferred stock receive dividends ahead of owners of common stock; owners of higher-class stock receive dividends before owners of lower-class stock.

Ticker

A unique symbol used by an exchange to identify a particular security; also called a ticker symbol.

“AAPL” is the ticker for Apple Computer, Inc.’s common stock; “AMB” is the ticker for AMB Property Corporation’s REIT; “PAUDX” is the ticker for PIMCO’s All-Asset, All-Authority D mutual fund; “DBA” is the ticker for the PowerShares DB Agricultural ETF; “^DJI” is the ticker for the Dow Jones Industrial Average index.

Variance

A statistical measure of how widely-dispersed a set of data is: the greater the variance, the more spread-out the data are.  The variance treats above-average values the same as below-average values: it takes each value, subtracts the average value, squares that difference, then averages all of those squares.