Active return is the amount that an investment gains or loses relative to the investment's benchmark. Discover more about active return here.

Fleeting Alpha: Evidence From the SPIVA and Persistence Scorecards

Active return is the percentage gain or loss of an investment relative to the investment's benchmark. Many fund managers combine active and passive management to create a core and satellite strategy that maintains core holdings in a diversified index fund to minimize risk while also actively managing a satellite component of the portfolio to try to outperform a benchmark. If the benchmark is a specific segment of the market, the same portfolio could hypothetically underperform the broader market and still have a positive active return relative to the chosen benchmark. A portfolio that outperforms the market has a positive active return, assuming that the market as a whole is the benchmark. For example, if the benchmark return is 5% and the actual return is 8%, the active return would then be 3% (8% - 5% = 3%).

Active Return

Active management of a portfolio or a fund requires a professional money manager or team to regularly make buy, hold, and sell decisions.

Better Investment Recommendations Equals Greater Returns? Dalbar Annual Report of Investor Returns Says Not So

The term active management implies that a professional money manager or a team of professionals is tracking the performance of a client's investment portfolio and regularly making buy, hold, and sell decisions about the assets in it. Those who adhere to passive management maintain that the best results are achieved by buying assets that mirror a particular market index or indexes and holding them long-term, ignoring the day-to-day fluctuations of the markets. Investment companies and fund sponsors believe it's possible to outperform the market and employ professional investment managers to manage the company's mutual funds. Over the 10 years ended in 2017, active managers who invested in large-cap value stocks were most likely to beat the index, outperforming by 1.13% on average per year.

What Is Active Management in Investing?

Actual return refers to the de facto gain or loss an investor receives or experiences on an investment or portfolio. 

An actual return refers to the actual gain or loss an investor experiences on an investment or in a portfolio. While companies must provide a reconciliation of the two sets of numbers (actual return versus expected return) in the footnotes to their financial statements, proposals have been made to change reporting requirements to make it easier for readers to discern companies’ actual returns and obligations. Actual return can also refer to the performance of pension plan assets.
The opposite of actual return is expected return. For example, a mutual fund describing and illustrating the cost and performance of a hypothetical investment over a five-year period would have to reference actual return numbers as well as actual cost figures. Image by Sabrina Jiang © Investopedia 2021
Since pension plan accounting rules allow employers (companies, governments, universities) to calculate assumed rates of return for their pension obligations, they do not reflect employers’ actual obligations to current and future retirees.

Actual Return

An aggressive investment strategy is a means of portfolio management that attempts to maximize returns by taking a relatively higher degree of risk.

An aggressive investment strategy typically refers to a style of portfolio management that attempts to maximize returns by taking a relatively higher degree of risk. A strategy that simply divided all available money equally into 20 different stocks could be a very aggressive strategy, but dividing all money equally into just 5 different stocks would be more aggressive still. The aggressiveness of an investment strategy depends on the relative weight of high-reward, high-risk asset classes, such as equities and commodities, within the portfolio. Because a lengthy investment horizon enables them to ride out market fluctuations, and losses early in one's career have less impact than later, investment advisors do not consider this strategy suitable for anyone else but young adults unless such a strategy is applied to only a small portion of one's nest-egg savings. An aggressive investment strategy typically refers to a style of portfolio management that attempts to maximize returns by taking a relatively higher degree of risk.

Aggressive Investment Strategy

Alpha risk is the risk in a statistical test of rejecting a null hypothesis when it is actually true. 

Alpha risk is the risk that in a statistical test a null hypothesis will be rejected when it is actually true. Alpha risk can be contrasted with beta risk, or the risk of committing a type II error (i.e., a false negative).
Alpha risk, in this context, is unrelated to the investment risk associated with an actively managed portfolio that seeks alpha, or excess returns above the market. Known as a type I error, alpha risk occurs during hypothesis testing when a null hypothesis is rejected, even though it is accurate and should not be rejected. If—when the test is conducted—the result seems to indicate that the stimuli applied to the test subject cause a reaction, the null hypothesis stating that the stimuli do not affect the test subject would, in turn, need to be rejected. Alpha risk is the risk that in a statistical test a null hypothesis will be rejected when it is actually true.

Alpha Risk

The annual return is the compound average rate of return for a stock, fund or asset per year over a period of time.

The annual return is the return that an investment provides over a period of time, expressed as a time-weighted annual percentage. The annual return required to achieve 85% over five years follows the formula for the compound annual growth rate (CAGR):
( ( 3 7 2 0 ) 1 5 ) − 1 \= 1 3 . 1 %  annual return \\begin{aligned} &\\left ( \\left ( \\frac { 37 }{ 20 } \\right ) ^ \\frac{ 1 }{ 5 } \\right ) - 1 = 13.1\\% \\text{ annual return} \\\\ \\end{aligned} ​((2037​)51​)−1\=13.1% annual return​ The annual return is the return that an investment provides over a period of time, expressed as a time-weighted annual percentage. Also known as an annualized return, the annual return expresses the stock’s increase in value over a designated period of time. An annual return can be more useful than a simple return when you want to see how an investment has performed over time, or to compare two investments.

Annual Return

The anti-Martingale system is a trading method that involves halving a bet each time there is a trade loss, and doubling it each time there is a gain.

The anti-Martingale, or reverse Martingale, system is a trading methodology that involves halving a bet each time there is a trade loss and doubling it each time there is a gain. The anti-Martingale system accepts greater risks during periods of expansive growth and is considered a better system for traders because it is less risky to increase trade size during a winning streak than during a losing streak. The anti-Martingale, or reverse Martingale, system is a trading methodology that involves halving a bet each time there is a trade loss and doubling it each time there is a gain. Opposite of the traditional Martingale system, the anti-Martingale strategy involves doubling up on winning bets and reducing losing bets by half. This technique is the opposite of the Martingale system, whereby a trader (or gambler) doubles down on a losing bet and halves a winning bet.

Anti-Martingale System

An approved list is a selection of investments that have been vetted for recommendation or purchase by a broker or mutual fund manager.

An approved list is a roster of pre-vetted investments that a broker may recommend to clients, or that a mutual fund manager may buy for a fund. An approved materials list or approved product list may be issued by a government agency to define standards for government contractors. An approved list is a roster of pre-vetted investments that a broker may recommend to clients, or that a mutual fund manager may buy for a fund. For example:
An annual approved broker/dealer list may be issued by a government entity to restrict who may be hired to handle investments for public funds. Brokerage companies and mutual fund companies provide approved lists of investments that may be recommended or purchased for their clients.

Approved List

An asset class breakdown illustrates the way that select asset classes are represented in a mutual fund, exchange-traded fund, or another portfolio.

An asset class breakdown provides the percentages of core asset classes found within a mutual fund, exchange-traded fund, or another portfolio. An asset class breakdown provides the percentages of core asset classes found within a mutual fund, exchange-traded fund, or another portfolio. Sub-asset class breakdowns may be used when a fund is highly concentrated in one asset class. An asset class breakdown demonstrates how certain core asset classes are accounted for in an investment portfolio. Individual fund holdings are used to provide exposure to various sub-asset classes, including U.S. stocks, developed market stocks, international stocks, and 7- to 10-year Treasury bonds.

Asset Class Breakdown

The asset mix is the breakdown of all assets within a fund or portfolio, helping investors understand the composition of a portfolio.

The asset mix is the breakdown of all assets within a fund or portfolio. Investors can decide how they would like to invest their capital; whether they want to be concentrated in one asset, such as stocks, or if they would like to have an asset mix, investing in a variety of assets, thereby increasing their potential for returns as well as reducing their risk, a strategy known as diversification. An asset mix breakdown helps investors understand the composition of a portfolio and a diversified asset mix reduces the risk of investing. Investors will generally find more traditional asset mix breakdowns by asset class in asset allocation or balanced funds. The balance of risk and potential return through the use of both equity and fixed-income investments overall is a guiding principle in determining the asset mix of an investment portfolio.

Asset Mix

Asset management is the practice of increasing wealth over time by acquiring, maintaining, and trading investments that can grow in value.

The 10 Largest Investment Management Companies Worldwide

Asset management is the practice of increasing total wealth over time by acquiring, maintaining, and trading investments that have the potential to grow in value. An asset manager initially meets with a client to determine what the client's long-term financial objectives are and how much risk the client is willing to accept to get there. The asset manager's role is to determine what investments to make, or avoid, to realize the client's financial goals within the limits of the client's risk tolerance. Asset management as a service is offered by financial institutions catering to high net-worth individuals, government entities, corporations, and institutional investors like colleges and pension funds. As of 2021, the five largest asset management institutions, based on global assets under management (AUM), were The Vanguard Group ($6.1 trillion), UBS Group ($3.5 trillion), Fidelity Investments ($3.3 trillion), State Street Global Advisors ($3 trillion), and Allianz ($2.5 trillion).

Asset Management

Assets under management (AUM) is the total market value of the investments that a person (portfolio manager) or entity (investment company, financial institution) handles on behalf of investors.

Assets under management (AUM) is the total market value of the investments that a person or entity manages on behalf of clients. AUM is the sum of the market value for all of the investments managed by a fund or family of funds, a venture capital firm, brokerage company, or an individual registered as an investment advisor or portfolio manager.
Used to indicate the size or amount, AUM can be segregated in many ways. Factors causing decreases in AUM include decreases in market value from investment performance losses, fund closures, and a decrease in investor flows. Assets under management (AUM) is the total market value of the investments that a person or entity handles on behalf of investors. Assets under management (AUM) is the total market value of the investments that a person or entity manages on behalf of clients.

Assets Under Management – AUM

An automatic investment plan (AIP) is an investment program that allows investors to contribute funds to an investment account in regular intervals.

Table of Contents
Automatic Investment Plans An automatic investment plan (AIP) is an investment program that allows investors to contribute money to an investment account at regular intervals to be invested in a pre-set strategy or portfolio. Outside of employer-sponsored automatic investment plans, individuals also have a wide range of options to choose from in the investment market. Investors can contribute through their employer by scheduling automatic deductions from their paycheck for investment in employer-sponsored investment accounts. Many investing platforms also offer options for electing to save automated investments in a money market account, earning interest until the money is allocated to other types of securities.

Automatic Investment Plan (AIP)

A benchmark is a standard against which the performance of a security, mutual fund or investment manager can be measured.

A benchmark is a standard against which the performance of a security, mutual fund, or investment manager can be measured. Depending on the particular investment strategy or mandate, the benchmark will differ,
Choosing the appropriate benchmark is important, as the wrong index can lead to benchmark error. To avoid benchmark error, it is important to use the most appropriate benchmark, or market, in your calculations, when creating a market portfolio under the capital asset pricing model (CAPM). In passive funds, the investment manager uses a replication strategy to match the holdings and returns of the benchmark index providing investors with a low-cost fund for targeted investing. Passive investment funds were created to provide investors exposure to a benchmark since it is expensive for an individual investor to invest in each of the indexes’ securities.

Benchmark

The Black-Litterman Model is a tool used by portfolio managers to match investor risk tolerance with expected outcomes.

The Black-Litterman (BL) Model is an analytical tool used by portfolio managers to optimize asset allocation within an investor’s risk tolerance and market views. The BL model starts from a neutral position using modern portfolio theory (MPT), and then takes additional input from investors' views to determine how the ultimate asset allocation should deviate from the initial portfolio weights. While the BL model is seen to improve the asset allocations provided by MPT by incorporating opinions on future outlook, because these projections are merely opinions or the result of pricing models that rely on subjective inputs, the BL model may result in bias or incorrect assumptions. The Black-Litterman Model is a portfolio allocation model that begins with modern portfolio theory (MPT) and adds in investor views of expected returns. The Black-Litterman model for portfolio construction is based on modern portfolio theory (MPT).

Black-Litterman Model

Bottom-up investing is an investment approach that focuses on the analysis of individual stocks and de-emphasizes the significance of macroeconomic cycles.

Bottom-up investing is an investment approach that focuses on the analysis of individual stocks and de-emphasizes the significance of macroeconomic cycles and market cycles. Alternatively, accounting irregularities on a particular company's financial statements may indicate problems for a firm in an otherwise booming industry sector.
Bottom-up investing is an investment approach that focuses on the analysis of individual stocks and de-emphasizes the significance of macroeconomic cycles and market cycles. For example, if the price of a commodity such as oil goes up and the company they are considering investing in, uses large quantities of oil to make their product, the investor will consider how strong an effect the rise in oil prices will have on the company’s profits. The bottom-up approach assumes individual companies can do well even in an industry that is not performing, at least on a relative basis.
The bottom-up approach is the opposite of top-down investing, which is a strategy that first considers macroeconomic factors when making an investment decision. Bottom-up investing is an investment approach that focuses on the analysis of individual stocks and de-emphasizes the significance of macroeconomic cycles and market cycles.

Bottom-Up Investing

A capital growth strategy seeks to maximize long-term capital appreciation of a portfolio via an allocation geared to assets with high expected returns. 

A capital growth strategy seeks to maximize capital appreciation of an investment portfolio over the long term through an asset allocation geared to securities with high expected returns. A portfolio that focuses on capital growth will contain approximately 65% to 70% equities, 20% to 25% fixed-income assets, and the balance in money market securities or cash.
Capital growth investors can simplify the investment process by choosing from packaged products including mutual funds and exchange traded funds (ETFs) that focus on capital appreciation. Many capital growth investors will select a moderate growth objective, while others will opt for a high growth objective. A capital growth strategy seeks to maximize capital appreciation of an investment portfolio over the long term through an asset allocation geared to securities with high expected returns. For capital growth, an investor would be well served to own funds or ETFs that provide diversified exposure to stocks with value and growth characteristics as well as different market capitalizations and geographies.

Capital Growth Strategy

Casino finance is a slang term for an investment strategy that is considered extremely risky. 

Casino finance is a slang term for an investment strategy that is considered extremely risky. Casino finance generally refers to high-dollar bets in the markets, either involving high-risk investments, and/or highly leveraged accounts. These investments are high-dollar bets in the markets, either involving high-risk investments, and/or highly leveraged accounts. The authors respond to libertarians and other laissez-faire advocates who might want to permit any voluntary transaction not directly harming a third party by arguing that when it comes to gambling in financial markets, many investors have no understanding of the risks they assume. The authors call on Republicans and other conservatives to use their track record on limiting other forms of gambling to seek regulations and hobble casino finance activity.

Casino Finance

In securities investing, commingling (commingled) is when money from different investors is pooled into one fund.

In securities investing, commingling (commingled) is when money from different investors is pooled into one fund. Other types of commingled funds include exchange-traded funds, commingled trust funds, collective investment trusts, and real estate investment trusts. For mutual fund investors, daily price quotes allow an investor to know their exact position in a mutual fund as a percentage of the fund’s total managed assets. Investors contributing money into a single fund is a structure that has been used in investment management since the first mutual funds were launched. Mutual funds and institutional commingled funds are two of the most popular commingled vehicles in the investment market.

Commingling (Commingled)

A complex capital structure is a construct where companies offer multiple forms of securities, rather than solely offering a single class of common stock.

The use of different forms of securities, rather than relying solely on one class of common stock. In fact, the most typical examples of dilutive securities are stock options paid to executives, who corporations traditionally compensate with a combination of bonuses, wages, and stock options, which enable executives to purchase newly-issued common stock shares for a set price, during a set period of time. For example, a company with a complex capital structure might use both Class A and Class B common stock and preferred stock, as well as both callable bonds and non-callable bonds. Examples of securities used in complex capital structure could include callable and non-callable bonds, plus Class B and Class A common stock. A company with a complex capital structure might have a combination of several different varieties of common stock classes—each carrying different voting privileges and dividend rates.

Complex Capital Structure

A constant ratio plan is defined as a strategic asset allocation strategy, which keeps the aggressive and conservative portions of a portfolio set at a fixed ratio.

Investment Management Through Formula Timing Plans

Some Theoretical Aspects of Formula Timing Plans

A constant ratio plan (also known as "constant mix" or "constant weighting" investing) is a strategic asset allocation strategy, or investment formula, which keeps the aggressive and conservative portions of a portfolio set at a fixed ratio. If a portfolio's strategic asset allocation is set to be 60% stocks and 40% bonds, a constant ratio plan will ensure that, as markets move, that 60/40 ratio is preserved over time. Constant ratio plans, together with constant dollar value plans, are similar to buy-and-hold asset allocation strategies used in portfolio management, except that buy-and-hold strategies never rebalance. A constant ratio plan is a strategic asset allocation strategy, which keeps the aggressive and conservative portions of a portfolio set at a fixed ratio. By selling outperforming stocks and buying underperforming ones, constant ratio plans run counter to momentum investing strategies that sell underperforming assets and buy outperforming ones.

Constant Ratio Plan

Contingent immunization is an investment approach where a fund manager switches to a defensive strategy if the portfolio return drops below a predetermined point.

Contingent immunization is an investment approach where a fund manager switches to a defensive strategy if the portfolio return drops below a predetermined point. Contingent immunization is an investment approach where a fund manager switches to a defensive strategy if the portfolio return drops below a predetermined point. Contingent immunization is an investment approach where a fund manager switches to a defensive strategy if the portfolio return drops below a predetermined point. Contingent immunization limits the losses from bad years by forcing the manager to return to a safer position after losses. The fund manager could be pushed out of the position in long-term government bonds by contingent immunization.

Contingent Immunization

Core holdings are the most important holdings in an investment portfolio because they have the greatest prospects.

Core holdings are the central investments of a long-term portfolio. Once an investor has built a strong core holding for their investment portfolio, they have more flexibility to take on risk in other areas of their portfolio.
Core holdings are the central investments of a long-term portfolio so it's essential that they have a history of reliable service and consistent returns. A portfolio with core holdings that are consistent and reliable will benefit from stable growth in safer sectors of the economy, while also taking advantage of growth opportunities in its non-core investments. Core holdings in a well-diversified portfolio tend to outperform a portfolio consisting entirely of growth stocks. When you build a long-term portfolio with core holdings, it is also easier to monitor and rebalance because it only contains a few investments.

Core Holding

Core plus is an investment management style that permits managers to add instruments with greater risk and greater potential return to a core base of holdings with a specified objective. 

JPMorgan Core Plus Bond Fund, Performance and Fees

JPMorgan U.S. Large Cap Core Plus Fund, Performance

JPMorgan U.S. Large Cap Core Plus Fund, Overview

Core plus funds are typically associated with fixed-income funds, adding alternative investments such as high-yield, global, and emerging market debt to a core portfolio of investment-grade bonds. Core plus is an investment management style that permits managers to augment a core base of holdings, within a specified-objective portfolio, with instruments that have greater risk and greater potential return. Core plus is an investment management style that permits managers to augment a core base of holdings with instruments that offer greater risk but greater potential return. The American Century Core Plus Fund is another example of a core plus fixed-income investment.

Core Plus

Cost basis is the original value of an asset for tax purposes, adjusted for stock splits, dividends and return of capital distributions. 

Cost basis is the original value of an asset for tax purposes, usually the purchase price, adjusted for stock splits, dividends, and return of capital distributions. You can calculate your cost basis per share in two ways:
Take the original investment amount ($10,000) and divide it by the new number of shares you hold (2,000 shares) to arrive at the new per share cost basis ($10,000/2,000=$5.00). Low cost: ($19 - $8) x 1,000 = $11,000
In this case, the investor would be better off if they had selected the FIFO method or the high cost method to determine the cost basis prior to selling the shares. If the reverse were true, with the future contract trading at $3.10 and the spot price being $3.50, the cost basis would be negative 40 cents, as a cost basis can be positive or negative depending on the prices involved. (For related reading, see: Understanding Stock Splits.)
In the event the shares were given to you as a gift, your cost basis is the cost basis of the original holder who gave you the gift.

Cost Basis

Covariance is an evaluation of the directional relationship between the returns of two assets.

Covariance measures the directional relationship between the returns on two assets. They are:
xi = a given x value in the data set
xm = the mean, or average, of the x values
yi = the y value in the data set that corresponds with xi
ym = the mean, or average, of the y values
n = the number of data points
Given this information, the formula for covariance is: **Cov(x,y) = SUM \[(xi - xm) \(yi - ym)\] / (n - 1)**
While the covariance does measure the directional relationship between two assets, it does not show the strength of the relationship between the two assets; the coefficient of correlation is a more appropriate indicator of this strength. The data set may look like:
Q1: x = 2, y = 10
Q2: x = 3, y = 14
Q3: x = 2.7, y = 12
Q4: x = 3.2, y = 15
Q5: x = 4.1, y = 20
The average x value equals 3, and the average y value equals 14.2. would be divided by (n-1), as follows:
Cov(x,y) = ((2 - 3) x (10 - 14.2) + (3 - 3) x (14 - 14.2) + ... (4.1 - 3) x (20 - 14.2)) / 4 = (4.2 + 0 + 0.66 + 0.16 + 6.38) / 4 = 2.85
Having calculated a positive covariance here, the analyst can say that the growth of the company's new product line has a positive relationship with quarterly GDP growth. To calculate the covariance, the sum of the products of the xi values minus the average x value, multiplied by the yi values minus the average y values

Covariance

Constant Proportion Portfolio Insurance (CPPI) is portfolio insurance that sets a floor on the value of a portfolio and allocates assets accordingly.

Constant Proportion Portfolio Insurance (CPPI) is a type of portfolio insurance in which the investor sets a floor on the dollar value of their portfolio, then structures asset allocation around that decision. The investor will make a beginning investment in the risky asset equal to the value of: (Multiplier) x (cushion value in dollars) and will invest the remainder in the conservative asset. Constant Proportion Portfolio Insurance (CPPI) is a type of portfolio insurance in which the investor sets a floor on the dollar value of their portfolio, then structures asset allocation around that decision. Constant Proportion Portfolio Insurance (CPPI) allows an investor to maintain exposure to the upside potential of a risky asset while providing a capital guarantee against downside risk. The two asset classes used in CPPI are a risky asset (usually equities or mutual funds) and a conservative asset of either cash, equivalents or treasury bonds.

Constant Proportion Portfolio Insurance (CPPI)

Cumulative return is the total change in the price of an investment over a set time period. It is an aggregate figure, not an annualized rate.

A cumulative return on an investment is the aggregate amount that the investment has gained or lost over time, independent of the amount of time involved. The cumulative return is expressed as a percentage, and it is the raw mathematical return of the following calculation:
( C u r r e n t   P r i c e   o f   S e c u r i t y ) − ( O r i g i n a l   P r i c e   o f   S e c u r i t y ) O r i g i n a l   P r i c e   o f   S e c u r i t y \\frac{(Current\\ Price \\ of \\ Security) - (Original \\ Price \\ of \\ Security)}{Original \\ Price \\ of \\ Security} Original Price of Security(Current Price of Security)−(Original Price of Security)​
The cumulative return is the total change in the investment price over a set time—an aggregate return, not an annualized one. Along with the cumulative return, an ETF or other fund usually indicates its compound return. A common way to present mutual fund or exchange traded fund (ETF) performance over time is to show the cumulative return with a visual, such as a mountain graph.

Cumulative Return

Debt signaling is a theory that associates the future performance of a company’s stock with declarations regarding its debt. 

Debt signaling is a financial theory that correlates a stock's future performance with any current announcements made regarding its debt. When a company increases its debt capital, especially at favorable interest rates, it signals that the company is both creditworthy and capable of going after growth opportunities, making it a positive signal.
If, on the other hand, a company is forced to reduce its debt load or seeks capital through an equity offering, it may be seen by investors as a negative signal.
In the world of finances and economics, corporations are always seeking new growth opportunities. When a company makes a decision to utilize debt financing through issuing corporate bonds, investors may believe the company is on solid financial footing and actively seeking growth opportunities at lower financing costs than via issuing stock. When a company announces that it will take on more debt (typically for a new project), that signals sound financial health to investors and to the market, making it a positive debt signal. Sometimes those signals come from the company’s management team, but they can also come from actions made by the company, including when the company says it will take on more debt.

Debt Signaling

Dedication strategy is an asset management method by which the expected returns on an investment portfolio are matched with estimated future liabilities.

California Employers' Pension Prefunding Trust (CEPPT) Fund

Dedication strategy is an asset management method by which the anticipated returns on an investment portfolio are matched with estimated future liabilities. Their portfolios typically include low-risk, fixed income securities, such as investment grade corporate bonds, government bonds and mortgage-backed securities, that allow for predictable income streams to match projected future obligations. A dedication strategy involves cash flow matching so that investment earnings will provide funds for anticipated future capital outlays. Dedication strategy is an asset management method by which the anticipated returns on an investment portfolio are matched with estimated future liabilities. A dedication strategy is frequently used in pension funds and insurance company portfolios to ensure that future liabilities can be met.

Dedication Strategy

Delta neutral is a portfolio strategy consisting of positions with offsetting positive and negative deltas so that the overall position of delta is zero.

Delta neutral is a portfolio strategy utilizing multiple positions with balancing positive and negative deltas so that the overall delta of the assets in question totals zero. The underlying asset, typically a stock position, always has a delta of 1 if the position is a long position and -1 if the position is a short position. Since the underlying stock's delta is 1, your current position has a delta of positive 200 (the delta multiplied by the number of shares). With this combined position of 200 Company X shares and 4 long at-the-money put options on Company X, your overall position is delta neutral. To obtain a delta-neutral position, you need to enter into a position that has a total delta of -200.

Delta Neutral

Discretionary investment management is a form of investing in which a client's buy and sell decisions are made by a portfolio manager.

Table of Contents
What Is Discretionary Investment Management?
Understanding Discretionary Investment Management
How Discretionary Investment Management Works
Benefits of Discretionary Management
Risks of Discretionary Management Discretionary investment management can only be offered by individuals who have extensive experience in the investment industry and advanced educational credentials, with many investment managers possessing one or more professional designations such as Chartered Financial Analyst (CFA), Chartered Alternative Investment Analyst Chartered Alternative Investment Analyst (CAIA), Chartered Market Technician (CMT) or Financial Risk Manager (FRM). Discretionary investment management is a form of investment management in which buy and sell decisions are made by a portfolio manager or investment counselor for the client's account. Discretionary investment management also aligns the investment manager's interest with that of the client, since managers typically charge a percentage of the assets under administration as their management fee. Discretionary investment management may also ensure that the client has access to better investment opportunities through the portfolio manager.

Discretionary Investment Management

Disintermediation is the removal of a middleman in the supply chain to allow producers to sell directly to their customers.

Table of Contents
What Is Disintermediation?
Understanding Disintermediation The travel industry has been utterly transformed by disintermediation, mostly through the internet.
The process began well before the creation of the World Wide Web when American Airlines introduced direct flight bookings on its Sabre Global Distribution System (now Travelocity) and made the service available on early online sites including PRODIGY and CompuServe.
The travel agent now has to struggle to compete for consumers who can book hotel rooms, cruises, rental cars, and flights directly from the providers or through a travel site that allows them to compare an exhaustive list of options.
Online travel booking is not, however, a perfect example of disintermediation. The concept of disintermediation originated in the financial industry as investors were given the opportunity to directly buy stocks, bonds, and other products without an intermediary such as a broker or a bank. The concept of disintermediation emerged in the late 1960s when many consumers, frustrated by low-interest rates on bank savings accounts, began investing directly in bonds and stocks. Disintermediation and the Internet
Cryptocurrencies
Pros and Cons of Disintermediation
Real-World Example
Disintermediation FAQs

Disintermediation

Diversification is an investment strategy based on the premise that a portfolio with different asset types will perform better than one with few.

Diversification is a risk management strategy that mixes a wide variety of investments within a portfolio. Classes can include:
Stocks—shares or equity in a publicly traded company
Bonds—government and corporate fixed-income debt instruments
Real estate—land, buildings, natural resources, agriculture, livestock, and water and mineral deposits
Exchange-traded funds (ETFs)—a marketable basket of securities that follow an index, commodity, or sector
Commodities—basic goods necessary for the production of other products or services
Cash and short-term cash-equivalents (CCE)—Treasury bills, certificate of deposit (CD), money market vehicles, and other short-term, low-risk investments Pros
Reduces portfolio risk
Hedges against market volatility
Offers higher returns long-term
Limits gains short-term
Time-consuming to manage
Incurs more transaction fees, commissions The rationale behind this technique is that a portfolio constructed of different kinds of assets will, on average, yield higher long-term returns and lower the risk of any individual holding or security. A diversified portfolio contains a mix of distinct asset types and investment vehicles in an attempt at limiting exposure to any single asset or risk.

Diversification

The diversity score is a measure created by Moody's Investors Service to estimate the amount of diversification in a pool of assets like a CLO.

The diversity score is a proprietary tool developed by Moody's Investors Service that estimates the level of diversification in a portfolio containing alternative assets. As correlations between CDOs in the marketplace grew, the scoring algorithm had to be modified, with its 2009 revision resulting in far greater complexity and nuance following the 2008 financial crisis.
The Moody's Diversity Score measures the number of uncorrelated assets that would have the same loss distribution as the actual portfolio of correlated assets. For example, if a portfolio of 100 assets had a diversification score of 50, this means the 100 assets held would actually only have the same loss distribution as 50 uncorrelated assets. The Diversity Score is obtained from the CDO's monthly surveillance reports, measuring the number of uncorrelated and identical assets that would have a similar loss distribution the actual portfolio of correlated assets. In the 2000s, Moody's observed that most CDOs at the time contained RMBS assets and as a result lacked diversity, so it no longer made sense to use the diversity score.

Diversity Score

Diworsification is the process of adding investments to one's portfolio in such a way that the risk/return trade-off is worsened.

Diworsification is the process of adding investments to one's portfolio in such a way that the risk/return trade-off is worsened. Diworsification is a concept that is inverse to modern portfolio theory, which helps investors to define an optimal allocation of individual securities across a portfolio, giving investors the best possible return level for the risk that they take on. Aggressive investors will be skewed more toward equities with allocations of up to 90% in equities and aggressive growth securities.
These allocations provide investors with a guide for managing the allocations to asset groups within their portfolios, but still leave them open to broad investment options that can result in diworsification by category. Institutional investors have the broadest access to modern portfolio theory technology that can offer the exact proportions of investment in a portfolio of individual securities for comprehensive optimization and diversification. Robo advisors and wrap accounts build their suggested portfolio allocation percentages based on modern portfolio theory and use advanced technology to advise investors.

Diworsification

Do-it-yourself (DIY) investing is an investment strategy where individual investors choose to build and manage their own investment portfolios. 

Table of Contents
Expand DIY investing offers individuals more control over their investments and can save them money in fees—but it also puts all the responsibility on their shoulders, and offers less protection in bearish or volatile markets.
Although there have always been individuals who managed their investments, two phenomena have helped to encourage DIY investing in recent years: the advent of discount brokerages and a multitude of online investment tools. Do-it-yourself investors commonly utilize discount brokerages and investment account platforms as opposed to full-service brokerages or professional money managers.
Do-it-yourself (DIY) investing involves individual investors managing their own portfolios. Online self-directed brokerage platforms—some strictly virtual, some operated by brick-and-mortar financial institutions—have made DIY investing more feasible and economical, with their discounted commissions and fees and robo advisor-managed portfolios. Two phenomena have helped to encourage DIY investing in recent years; the advent of discount brokerages and online investment tools and platforms.

Do-It-Yourself (DIY) Investing

Dynamic asset allocation is a portfolio management strategy in which the asset class mix is adjusted based on macro trends such as economic growth or the state of the stock market.

Dynamic asset allocation is a portfolio management strategy that frequently adjusts the mix of asset classes to suit market conditions. Dynamic asset allocation is a strategy of portfolio diversification in which the mix of financial assets is adjusted based on macro trends, either in the economy, or the stock market.
The stock and bond components of a portfolio might be adjusted based on the well-being of the economy, the health of a specific sector, or the presence of a broad-based bear or bull market. If most holdings in the portfolio are trending higher, a management strategy that favors buy-and-hold investing, such as constant-weighted asset allocation, may outperform dynamic asset allocation due to fewer transaction costs. Dynamic asset allocation is a portfolio management strategy that frequently adjusts the mix of asset classes to suit market conditions. An investment manager using dynamic asset allocation may decide to reduce a portfolio’s equity holdings and increase its fixed-interest assets to reduce risk.

Dynamic Asset Allocation

The efficient frontier comprises investment portfolios that offer the highest expected return for a specific level of risk.

This year's laureates are pioneers in the theory of financial economics and corporate finance

The efficient frontier is the set of optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return. The optimal portfolio aims to balance securities with the greatest potential returns with an acceptable degree of risk or securities with the lowest degree of risk for a given level of potential return. The efficient frontier is the set of optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return. A risk-seeking investor would select investments that lie on the right end of the efficient frontier which is populated with securities that are expected to have a high degree of risk coupled with high potential returns. Rather, it aims to balance securities with the greatest potential returns with an acceptable degree of risk or securities with the lowest degree of risk for a given level of potential return.

Efficient Frontier

Enhanced indexing is an investment approach that attempts to amplify the returns of an underlying portfolio or index.

Enhanced indexing is a portfolio management approach that attempts to amplify the returns of an underlying portfolio or index and outperform strict indexing. Enhanced index funds can be more profitable than regular index funds by positioning the portfolio to a particular sector, timing the market, and investing only in specific securities in the index. Since enhanced index funds are essentially actively managed, the investment has additional risk in the form of manager risk—whereas index funds only have to worry about market risk. Since enhanced index funds are essentially actively managed, the investment has additional risk in the form of manager risk—whereas index funds only have to worry about market risk. Also, because enhanced index funds are actively managed, they have higher management expense ratios compared with index mutual funds.

Enhanced Indexing

An equity style box is a graphic representation of an investment's defining factors, designed by financial services researcher Morningstar, Inc.

Mutual Funds: Data Definitions: Portfolio

An equity style box is a visual representation of the key investment characteristics of stocks and stock mutual funds. Morningstar offers a domestic equity style box, an international equity style box, and a fixed-income style box. An equity style box is composed of nine squares, or categories, with the investment features of stocks/stock mutual funds presented along its vertical and horizontal axes. As of the January 2021 list from Morningstar, some of the highest-ranked large-cap/growth funds include American Funds AMCAP, Fidelity Contrafund and Fidelity Growth Company, Morgan Stanley Inst Growth, and Inst Advantage, Primecap Odyssey Growth, Vanguard Capital Opportunity, Vanguard Growth, and Vanguard Growth Index. An equity style box is a visual representation of the key investment characteristics of stocks and stock mutual funds.

Equity Style Box

An equity risk premium is an excess return that investing in the stock market provides over a risk-free rate.

Because equity risk premiums require the use of historical returns, they aren't an exact science and, therefore, aren't completely accurate.
To calculate the equity risk premium, we can begin with the capital asset pricing model (CAPM), which is usually written as **Ra = Rf + βa (Rm - Rf),*where:
Ra = expected return on investment in **a** or an equity investment of some kind
Rf = risk-free rate of return
βa = beta of **a**
Rm = expected return of the market
So, the equation for equity risk premium is a simple reworking of the CAPM which can be written as: **Equity Risk Premium = Ra - Rf = βa (Rm - Rf)**
If we are simply talking about the stock market (a = m), then Ra = Rm. The term equity risk premium refers to an excess return that investing in the stock market provides over a risk-free rate. An equity risk premium is an excess return earned by an investor when they invest in the stock market over a risk-free rate. Whatever return you earn above a risk-free investment such as U.S. Treasury bill (T-bill) or a bond is called an equity risk premium.

Equity Risk Premium

Formula investing is a method of investing that rigidly follows a prescribed theory or formula to determine investment policy.

Formula investing is a method of investing that rigidly follows a prescribed theory or formula to determine investment policy. Formula investing is appealing to market participants who find active investing stressful or overwhelming; formula investing is structured and consistent. Formula investing may simplify the investment process for inexperienced investors or those who lack the time to actively manage their accounts; however, the risk is that a formula investor can't react fast enough to changes in the market or the economy. Formula investing takes most of the discretionary decision-making out of the investment process, which can reduce stress for investors and help them automate their strategies; investors simply follow the rules or formula and invest accordingly. Formula investing is a method of investing that rigidly follows a prescribed theory or formula to determine investment policy.

Formula Investing

A fulcrum fee is a performance-based fee that adjusts up or down based on whether the performance outperforms or underperforms a benchmark.

17 CFR Part 275 Release No. IA-4388; File No. S7-08-16 Performance-Based Investment Advisory Fees

Fidelity Confirms Equity Fee Overhaul With 'Fulcrum' Fee Model

A fulcrum fee is a performance-based fee that adjusts up or down based on outperforming or underperforming a benchmark. A couple of conditions must be met for an adviser to charge a fulcrum fee:
1) The returns must exceed the appropriate benchmark (and if they don't, the base fee must be reduced).
2) The only clients that can be charged this way are individuals or registered investment companies with an account value greater than $1 million or a net worth greater than $2.1 million. It wasn't until 1970 that congress permitted performance-based fees, such as a fulcrum fee, but only by Registered Investment Advisers (RIA) serving as investment managers to mutual funds. According to research, incentive fees for mutual funds have not shown any association with improved risk-adjusted performance.﻿﻿ Rather, mutual fund managers paid via incentive fees tend to achieve higher returns simply by taking on more risk. A fulcrum fee is a performance-based fee that adjusts up or down depending on whether or not performance benchmarks are met.

Fulcrum Fee

Geographical diversification is the practice of investing across geographic regions to reduce risk and improve returns.

Diversification, generally speaking, is the practice of allocating money to a wide variety of investments so as to minimize risk. Faster-growing economies may also involve elevated political risk, currency risk, and general market risk compared with developed economies. In addition, geographic diversification may have a positive impact on a corporation's revenues, as high-growth regions offset the effects of lower-growth regions. Diversifying a portfolio across different geographic regions can help investors compensate for the volatility of a single economic region, in the long reducing risk relative to less-diversified portfolios. For example, if the U.S. and European stock markets are declining because their economies are in a recession, an investor may allocate part of a portfolio to emerging economies with higher growth rates, such as China and India.

Geographical Diversification

Glide path refers to a formula that defines the asset allocation mix of a target date fund, based on the number of years to the target date. 

Other target-date funds assume that the investor holds onto the funds, and therefore includes more equities in the asset mix, reflecting a longer time horizon. Glide path refers to a formula that defines the asset allocation mix of a target-date fund, based on the number of years to the target date. The glide path creates an asset allocation that typically becomes more conservative (i.e., includes more fixed-income assets and fewer equities) as a fund gets closer to the target date. Each family of target-date funds has a different glide path, which determines how the asset mix changes as the target date approaches.

Glide Path

Grey wave describes an investment or company thought to be profitable in the long term or extended long term.

A grey wave describes an investment or company thought to be profitable in the long term or extended long term. A grey wave is an investment or company that an investor thinks will be profitable in the long term or extended long term. A grey wave describes an investment or company thought to be profitable in the long term or extended long term. Grey wave stocks are purchased by long-term investors who are looking at an extremely long or perpetual time horizon. Grey wave describes an investment in the company that will likely not yield a positive return until a long time has passed.

Grey Wave

"Gunslinger" is a slang term for an aggressive portfolio manager.

"Gunslinger" is a slang term for an aggressive portfolio manager. Because it is extremely difficult to predict the future direction of the stock market, investors who try to time the market, especially mutual fund investors, tend to underperform investors who remain invested. For the average investor who does not have the time, or desire, to watch the market on a daily basis, there are good reasons to avoid market timing and focus on investing in the long run. The goal is to leverage higher risk and techniques like market timing, leverage, or short selling to generate above-average returns. Gunslingers are portfolio managers or traders who tend to take high-risk or aggressive positions in the market.

Gunslinger

A hands-off investor takes a more passive approach to wealth building than an active investor, preferring to set up a portfolio and make few changes over time.

A hands-off investor prefers to set an investment portfolio and make only minor changes for a long period of time. A hands-off investor is more likely to be drawn to index funds, exchange-traded funds (ETFs), or target-date funds, than to picking individual stocks or other securities. Since index funds often have very low expense ratios, hands-off investors often enjoy a built-in advantage over active traders who pay more in trading commissions, lose out to the bid-ask spread and incur the higher tax rates on short-term capital gains and nonqualified dividends. Dalbar correctly points out that an index is always in the market and always fully invested while investors may be on the sidelines waiting for the right moment to return to the market.
Hands-off investors can benefit from the price return of their investment but also from the reinvestment of dividends. Many hands-off investors use index funds or target-date funds, which make only small and slow changes to their holdings and therefore do not require much monitoring.

Hands-Off Investor

Heteroskedastic refers to a condition in which the variance of the residual term, or error term, in a regression model varies widely. 

Heteroskedastic refers to a condition in which the variance of the residual term, or error term, in a regression model varies widely. For example, developers of the CAPM model were aware that their model failed to explain an interesting anomaly: high-quality stocks, which were less volatile than low-quality stocks, tended to perform better than the CAPM model predicted. These predictor variables have been added because they explain or account for variance in the dependent variable, portfolio performance, then is explained by CAPM. With this factor now included in the model, the performance anomaly of low volatility stocks was accounted for. Extensions of this model have added other predictor variables such as size, momentum, quality, and style (value vs. growth).

Heteroskedastic

Homemade dividends are a form of investment income that comes from the sale of a portion of one’s portfolio.

Homemade dividends are a form of investment income generated from the sale of a portion of an individual's investment portfolio. Generally speaking, a company's board declares special dividends after witnessing exceptionally strong earnings results or when a company seeks either to materially change its financial structure or to spin off a subsidiary company. Homemade dividends are unlike the traditional dividends that a company’s board of directors issues to shareholders. This idea sits at the crux of the dividend irrelevance theory, which claims that investors fundamentally do not need to pay heed to a company's dividend payment policy, since they retain the option of selling off portions of their equity portfolios, should they ever need to generate cash. The ability of investors to create their own homemade dividends has provoked questions about whether traditional dividends offer real value.

Homemade Dividends

An investment structure in which several investment vehicles, each individually managed, pool their assets, contributing to one central investment vehicle.

The Benefits of Master-Feeder Fund Structures for Asian-based Hedge Fund Managers

Small Investors Can Often Skirt Those Large-Sum Rules

BlackRock Treasury Strategies Institutional Fund

In a hub and spoke structure, U.S. investors in an onshore fund would be unaffected by any obligations of the offshore fund and vice versa. BlackRock is one fund manager broadly employing this fund structure in a variety of hub and spoke setups. Each spoke is individually managed by particular fund managers, while the hub is managed by one portfolio manager utilizing an overarching investment strategy. These funds are able to keep fund operating costs relatively low in comparison to their competitors due to the hub and spoke structure.

Hub and Spoke Structure

Incremental value at risk is the amount of uncertainty added or subtracted from a portfolio by purchasing a new investment or selling an existing one.

Incremental value at risk (incremental VaR) is the amount of uncertainty added to or subtracted from a portfolio by purchasing or selling an investment. To calculate the incremental value at risk, an investor needs to know the portfolio's standard deviation, the portfolio's rate of return, and the particular asset in question's rate of return and portfolio share. To calculate the incremental value at risk, an investor needs to know the portfolio's standard deviation, the portfolio's rate of return, and the asset in question's rate of return and portfolio share. For example, if you calculate that the incremental value at risk of Security ABC is positive, then either adding ABC to your portfolio or if you already hold it, increasing how many shares you hold of ABC within your portfolio will increase the portfolio's overall VaR. Incremental value at risk is based on the value at risk measurement (VaR), which attempts to calculate the likely worst-case scenario for a portfolio as a whole in a given time frame.

Incremental Value at Risk

An inefficient portfolio is one that delivers an expected return that is too low for the amount of risk taken on. 

An inefficient portfolio is one that delivers an expected return that is too low for the amount of risk taken on. In an efficient portfolio, investable assets are combined in a way that produces the best possible expected level of return for their level of risk—or the lowest risk for a target return. In an efficient portfolio, investable assets are combined in a way that produces the best possible expected level of return for their level of risk—or the lowest risk for a target return. In general, an inefficient portfolio has a poor risk-to-reward ratio; it exposes an investor to a higher degree of risk than necessary to achieve a target return. Practically, MPT can be used to construct a portfolio that minimizes risk for a given level of expected return; it is very useful for investors trying to construct efficient portfolios using exchange-traded funds (ETFs).

Inefficient Portfolio

The information coefficient (IC) is a measure used to evaluate the skill of an investment analyst. 

The information coefficient (IC) is a measure used to evaluate the skill of an investment analyst or an active portfolio manager. As a hypothetical example, if an investment analyst made two predictions and got two right, the information coefficient would be:
IC \= ( 2 × 1 . 0 ) − 1 \= \+ 1 . 0 \\begin{aligned} &\\text{IC} = (2 \\times 1.0) - 1 = +1.0 \\\\ \\end{aligned} ​IC\=(2×1.0)−1\=+1.0​
If an analyst's predictions were only half of the time right, then:
IC \= ( 2 × 0 . 5 ) − 1 \= 0 . 0 \\begin{aligned} &\\text{IC} = (2 \\times 0.5) - 1 = 0.0 \\\\ \\end{aligned} ​IC\=(2×0.5)−1\=0.0​
If, however. none of the predictions were right, then:
IC \= ( 2 × 0 . 0 ) − 1 \= − 1 . 0 \\begin{aligned} &\\text{IC} = (2 \\times 0.0) - 1 = -1.0 \\\\ \\end{aligned} ​IC\=(2×0.0)−1\=−1.0​
The IC is only meaningful for an analyst who makes a large number of predictions. IC \= ( 2 × Proportion Correct ) − 1 where: Proportion Correct \= Proportion of predictions made correctly by the analyst \\begin{aligned} &\\text{IC} = (2 \\times \\text{Proportion Correct}) - 1 \\\\ &\\textbf{where:} \\\\ &\\text{Proportion Correct} = \\text{Proportion of predictions made} \\\\ &\\text{correctly by the analyst} \\\\ \\end{aligned} ​IC\=(2×Proportion Correct)−1where:Proportion Correct\=Proportion of predictions madecorrectly by the analyst​
The information coefficient describes the correlation between predicted and actual stock returns, sometimes used to measure the contribution of a financial analyst. The IC can range from 1.0 to -1.0, with -1 indicating the analyst's forecasts bear no relation to the actual results, and 1 indicating that the analyst's forecasts perfectly matched actual results. An IC of +1.0 indicates a perfect linear relationship between predicted and actual returns, while an IC of 0.0 indicates no linear relationship.

Information Coefficient (IC)

An international portfolio is a selection of investment assets that focuses on securities from foreign markets rather than domestic ones.

Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)

An international portfolio is a selection of stocks and other assets that focuses on foreign markets rather than domestic ones. An international portfolio may appeal to the investor who wants some exposure to the stocks of economies that are growing faster than that of the U.S.
The risks of such a strategy can be reduced by mixing emerging-market stocks with shares in some of the solid performers of industrialized nations.
The investor might also take a look at some of the U.S. companies that are experiencing their fastest growth abroad. The most cost-effective way for investors to hold an international portfolio is to buy an exchange-traded fund (ETF) that focuses on foreign equities, such as the Vanguard FTSE Developed Markets ETF or the Schwab International Equity ETF. The domestic portfolio may decline by 10% while the international portfolio could advance 20%, leaving the investor with an overall net return of 10%. Risk can be reduced further by holding a selection of stocks from developed and emerging markets in the international portfolio.

International Portfolio Advantages and Limitations

Investment analysis is researching and evaluating a stock or industry to determine how it is likely to perform and whether it suits a given investor.

Warren Buffett's 'Bottom Up' Approach To Investing Is What's Needed In Trying Times

Schwab Sector Insights: A View on 11 Equity Sectors

Table of Contents
What Is Investment Analysis?
Understanding Investment Analysis
Types of Investment Analysis Key factors in investment analysis include the appropriate entry price, the expected time horizon for holding an investment, and the role the investment will play in the portfolio as a whole. Other investment analysis methods include fundamental analysis and technical analysis. Investment analysis can also involve evaluating an overall investment strategy in terms of the thought process that went into making it, the person's needs and financial situation at the time, how the portfolio performed, and whether it's time for a correction or adjustment. The aim of investment analysis is to determine how an investment is likely to perform and how suitable it is for a particular investor.

Investment Analysis

An investment philosophy is a set of guiding principles that inform and shape an individual's investment decision-making process.

An investment philosophy is a set of beliefs and principles that guide an investor's decision-making process. Popular investment philosophies include value investing, focusing on shares that the investor believes are fundamentally underpriced; growth investing, which targets companies that are in a growth or expansion phase; and investing in securities that provide a return in interest income. Similarly, proponents of socially responsible investing are likely to remain steadfast in their avoidance of companies whose activities they disfavor—such as firearms production or gambling—even when fundamentals or technical factors are favoring those companies' stocks.
George Soros is a well-known short-term speculator. Socially responsible investing (SRI), focuses on investing in companies whose practices align with an investor's values as they pertain to the company's impact on society and the environment. His hedge fund, the Quantum Fund, is known for its global macro strategy, a philosophy centered around making large, one-way bets on the movements of currency rates, commodity prices, stocks, bonds, derivatives, and other assets based on macroeconomic analysis.

Investment Philosophy

An investment thesis is a strategy proposal backed by original research and analysis. It is important to decide your next step.

An investment thesis is a reasoned argument for a particular investment strategy, backed up by research and analysis. An investment thesis can help individual investors evaluate investment ideas and select the ones that can best help them meet their investment goals. In the financial world, an analyst may prepare a formal document outlining an investment thesis for presentation to potential investors or an investment committee. An investment thesis is a written document that recommends a new investment, based on research and analysis of its potential for profit. When a thesis concerns a big trend, such as a global macro perspective, the investment thesis may be well documented and might even include a fair amount of promotional materials for presentation to potential investing partners.

Investment Thesis

Investment ideas are specific views, plans, or ideas on ways to invest money effectively.

Investment ideas are specific views, plans, or insights on ways to invest money effectively. Investment advisors and professional portfolio managers recommend different investments based on individual circumstances and build targeted investment portfolios around investment strategies and ideas that target a specific style. Financial advisors can use a range of tools to analyze and develop investment strategies for investors; these investment ideas are often based on asset class risk and modern portfolio theory. Professional portfolio managers also build targeted investment portfolios around investment strategies and ideas that target a specific style. Conservative investors or investors approaching retirement tend to choose higher allocations of credit investments with lower risk, while more aggressive investors seek out portfolios with higher risk through higher equity allocations.

Investment Ideas

An investment pyramid is a strategy used by investors by layering smaller weights of more risky assets on top of larger allocations to more conservative assets.

An investment pyramid, or risk pyramid, is a portfolio strategy that allocates assets according to the relative risk levels of those investments. The strategy calls for allocating the largest proportion of capital to the low-risk assets at the bottom, and the smallest amount to the speculative assets at the top.
An investment pyramid strategy builds a portfolio with the lowest risk investments as the base, equity securities of established companies as the middle, and speculative securities as the top.
The base (i.e. the widest part of the pyramid) would contain the highest allocation of assets and would include cash and CDs, short-term government bonds, and money market securities. The bottom and widest part of the pyramid is comprised of low-risk investments, the mid-portion is composed of growth investments, and the smallest part at the top is allocated to speculative investments.
The investment pyramid is an asset allocation strategy that investors use to diversify their portfolio investments according to the risk profile of each security. The pyramid, representing the investor's portfolio, has three distinct tiers: low-risk assets at the bottom such as cash and money markets; moderately risky assets like stocks and bonds in the middle; and high-risk speculative assets like derivatives at the top. An investment pyramid, or risk pyramid, is a portfolio strategy that allocates assets according to the relative risk levels of those investments.

Portfolio Management

More in Investing

Terms in Portfolio Management