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Glossary of
Investment Terms
glossary of terms

actively managed investment

Relies on the expertise of a portfolio

manager to choose the investments
holdings in an attempt to outperform
a predetermined benchmark over the
course of a full market cycle.
aggressive portfolio Tends to
encompass (1) relatively higher levels of
exposure to equities and to investments
outside the investors home country and
currency; and (2) relatively lower, or in
some cases zero, levels of exposure to
cash, to fixed income and investments
inside the investors home country, and
to currency. These risk profiles may
generally be expected to exhibit higher
price volatility as measured by the
standard deviations of annual returns
from the portfolio and generally seek to
generate a somewhat lower proportion of
its returns from income as compared with
capital gains.
alpha Measures the difference
between a funds actual returns and
its expected performance, given its
level of risk as measured by Beta. A
positive alpha risk indicates the fund has
performed better than its Beta would
predict. A negative Alpha indicates
the funds underperformance given the

expectations established by the funds

Beta. The accuracy of Alpha is therefore
dependent on the accuracy of Beta. Many
investors see Alpha as a measurement of
the value added or subtracted by a fund
manager.

alternative investments

Generally refer to a diverse set of

investment strategies that fall outside
of the traditional purchase and sale
of stocks and bonds. Some familiar
examples of alternative investments
include hedge funds, private equity and
real estate. The appeal of alternatives lies
in their potential to provide attractive
risk-adjusted returns and additional
diversification when compared to
traditional asset classes.
asset allocation How a portfolio
is divided among different types on
investments, such as stocks, bonds and
cash.
balanced portfolio A portfolio
containing several different investment
types. Most balanced portfolios are
invested in stocks, bonds and money
market instruments.
basis point A unit that is equal to
1/100th of 1%, and is used to denote
the change in a financial instrument.

The basis point is commonly used for

calculating changes in interest rates,
equity indexes and the yield of a fixedincome security.
benchmark A standard against which
the performance of a security, mutual
fund or investment manager can be
measured.
beta Measures an investments
volatility relative to its benchmark. An
investment with a Beta higher than
1.0 has historically been more volatile
than the benchmark. Conversely, an
investment with a Beta lower than 1.0 has
historically been less volatile than the
benchmark. See also volatility.
bond A long-term debt security
representing a contractual agreement
by a company or government to repay
borrowed money by a specified time at a
specified interest rate.
capital appreciation Increase in
the price of an investment; also commonly
referred to as the investments growth.

capital gain/loss (realized/

unrealized) The profit (loss) that

results from a change in the price of an

asset. A realized gain (loss) occurs when
an investment security is sold as a price
above (below) its cost.

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capital preservation An
investment objective in which
protecting the investors initial
investment from loss is the primary
goal.
conservative portfolio Tends
to encompass (1) relatively lower, or
in some cases zero levels of exposure
to equities and to investments outside
the investors home country and
currency; and (2) relatively higher
levels of exposure to cash, to fixed
income and investments inside the
investors home country, and to
currency. These risk profiles may
generally be expected to exhibit
lower price volatility as measured
by the standard deviations of
annual returns from the portfolio
and generally seek to generate a
somewhat greater proportion of its
returns from income as compared
with capital gains.
consumer price index (cpi)

A measure of inflation. The CPI

is equal to the sum of prices of a
number of goods purchases by
consumers and weighted by the
proportion each represents in a
typical consumers budget.
credit quality A measure of
the likelihood that a company will be
able to make interest and principal
payments on its bonds or other
debt securities. Standard & Poors
Corporation and Moodys Investors
Service rate the credit quality of
publicly traded debt securities.
Bonds with the highest credit quality
ratings are known as investment
grade, and bonds with poor
credit quality ratings are known as
speculative, high yield or junk
bonds.
current income Cash interest
regularly received on fixed income
investments and cash dividends
regularly received on stocks.
developed markets While not
strictly defined, includes countries
that (i) possess a per capita Gross
Domestic Product substantially
higher than the average for Emerging

Markets; (ii) have fewer governmentimposed barriers to foreign

investment; and (iii) have more strict
regulatory environments. Investing
in these countries is perceived
as less risky because they are
generally considered more politically
and/or economically stable than
countries in the Emerging Markets.
Countries in the Developed Markets
category include the United States,
Canada, Japan and Germany, among
others.
diversification The process of
investing in a number of different
types of investments to reduce the
risk of poor performance by any
one type of investment having a big
impact on overall portfolio results.
Diversification does not ensure
against loss.
dividend Cash payment made by
a company to stockholders.
dividend yield Total amount of
cash dividends received annually on a
share of stock divided by the price of
the stock.
dollar-weighted return A
method of calculating a portfolio
return that looks at the total dollar
values at the beginning and at the
end of an investment, including any
additions or withdrawals of funds, as
well as the income and capital gains
or losses.
economic sectors Types of
industries represented by the stocks
held by the fund. The percentage
of the funds equity securities
representing each economic sector
is compared to the percentage
of securities held in the funds
benchmark.
emerging markets While not
strictly defined, includes countries
that (i) possess a per capita Gross
Domestic Product substantially
below the average for Developed
Markets; (ii) have substantially
greater government-imposed barriers
to foreign investment; and (iii) may
have lax regulatory environments.
Investing in these countries is

perceived as more risky because

they may not be as politically and/
or economically stable as countries
in the Developed Markets. Countries
in the Emerging Markets category
include Brazil, Chile, Mexico and
Taiwan, among others.
erisa The Employee Retirement
Income Security Act. Passed in
1974, ERISA established the legal
standards by which retirement plans
are required to be managed.
equity The ownership interest of
common and preferred stockholders
in a company. See also stock.
exchange-traded fund More
commonly known as ETFs, exchangetraded funds are investment vehicles
designed to replicate the daily
movement of a particular market
index or other benchmark. Like
stocks, ETFs are listed and traded
throughout the day on a public
exchange or equity market. Though
some recent ETFs have actively
managed components, virtually all
exchange-traded funds are passively
managed.
expected return The return
investors anticipate they will receive
on an investment over some future
period. The expected return often
differs from the investors realized or
actual return.
expense ratio Measures a funds
annual expenses as a percentage
of the funds net assets. Expenses
include all management and
administrative fees, but exclude
brokerage costs such as commissions.
fiduciary A person or group
vested with legal power and
responsibilities that are to be used
for the benefit of another person or
group.

fixed income investments

Debt securities, such as bonds and

money market instruments, with
specified interest and principal
payment dates and amounts. Can
also include preferred stock.

gross-of-fee performance A
measure of investment performance

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that does not include the impact of

fees.
growth stocks Stocks of
companies whose earnings are
expected to grow rapidly.
investment grade Fixed
income investments receiving high
credit quality ratings. Bonds are
considered investment grade if
they have a BBB or better rating by
Standard & Poors Corporation or
a Baa or better rating by Moodys
Investors Service. See also credit
quality.
investment manager The
individual or firm responsible for the
day-to-day decisions involving an
investment portfolio. The manager
decides which stocks or bonds to
buy or sell and when. Investment
managers must be registered with the
Securities and Exchange Commission
and/or with the state there they do
business.
investment objective The
goal of an investment strategy
followed by an investor or investment
manager. Investment objectives
can be designed to generate longterm growth, current income or a
combination of both.

investment policy statement

A summary of an individuals or
institutions investment objectives
that serves as a guide for many
investment decisions.
investment style Refers to a
fund managers general discipline
and philosophy that is employed
during the investment decisionmaking process. Among the most
recognized equity investment styles
are growth, value and core.
investment sub-style Further
sub-divisions that can help investors
understand the investment approach
of a particular manager and the
possible performance and portfolio
characteristics associated
with that approach.
liquidity The ease with which
an investment may be bought or
sold quickly without having a

significant impact on the price of that

investment.
loss harvesting Selling
securities at a loss to offset a capital
gains tax liability.
manager tenure Indicates
the number of years the current
portfolio manager has been managing
a portfolio or fund. When more than
one portfolio manager manages a
portfolio or fund, the average tenure
of the managers is listed.
market capitalization The
market value of a company. It equals
the current stock price of a company
multiplied by the total number of
outstanding shares.
market cycle Generally
regarded as a time period of 5 to 10
years.
market timing An attempt to
sell investments before they decrease
in value and buying them when they
are about to increase in valuein
other words, to buy low and sell
high. Investors who attempt to time
the markets will move their money
among stocks, bonds, cash or other
investment instruments based on
their expectations of short-term price
changes in the capital markets.
money market The market
in which short-term, highly liquid,
low-risk assets such as Treasury bills,
bank certificates of deposit (CDs),
corporate commercial paper and
bankers acceptances are traded.
mutual fund An investment
company that invests in different
types of securities, such as stocks or
bonds, on behalf of individuals who
have similar investment goals (i.e.,
the funds shareholders). A mutual
fund generally adheres to a distinct
investment objective and investment
policies. The assets are managed by a
professional portfolio manager hired
by the fund, and investors participate
by owning shares of the fund rather
than the funds underlying securities.
net-of-fee performance A
measure of investment performance
that includes the impact of fees.

nominal return The return on

an investment, not adjusted for the
effect of inflation.
passively managed
investment Designed to mimic

the holdings of a benchmark in order

to match the benchmarks returns
before expenses, not exceed them.

p/e ratio (price/earning

ratio) Determined by dividing the

stock price by earnings per share.

P/E ratios can be interpreted as how
much an investor is willing to pay for
one years earnings.
performance The change in
value of an investment or portfolio
over a specific period of time. The
overall performance of an investment
includes any income and realized
and unrealized capital gains and/or
losses.
portfolio The combined
securities held by an investor.

portfolio characteristics

Important information about the

fund. Included are the name of
the fund manager and the number
of years the manager has been
overseeing the funds investments.
Portfolio characteristics also provide
a breakdown of the funds assets in
the three major asset classes: stocks,
bonds and cash.
principal The amount of money
borrowed by a company in issuing a
bond or other fixed income security.
For many fixed income securities,
it represents the amount that must
be repaid by the borrower upon
maturity.
real return The return on
an investment minus the effects of
inflation.

representative holdings

Indicate representative stocks that

comprise significant percentages of
the funds investments.
risk The possibility that the
actual return on an investment will
be different from the expected return.
Typically, expect high potential
returns for taking on greater risk.
However, not investing aggressively

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enough may lead to short fall.

s&p 500 index A representative
sample of the 500 leading companies
in leading industries of the U.S.
economy. Although the S&P 500
focuses on the large-cap segment of
the market, with over 80% coverage
of U.S. equities, it is also an ideal
proxy for the total market. The Index
is calculated using a baseweighted
aggregate methodology, meaning the
level of the Index reflects the total
market value of all component stocks
relative to a particular bas period.
Total market value is determined by
multiplying the price of its stock by
the number of shares outstanding.

securities and exchange

commission (sec) A federal

government agency, which was

created by the Securities and
Exchange Act of 1934, that regulates
the securities industry and
administers federal securities laws.

separately managed account

Often referred to as an SMA, a

separately managed account typically
consists of a customized portfolio
of stocks, bonds or other assets
managed on the investors behalf by
a professional portfolio manager.
Because the investor directly owns
all the underlying securities in a
separately managed account, this
type of investment potentially offers
the opportunity to manage the timing
of future tax liabilities, as well as
other services tailored specifically to
the investors needs.
sharpe ratio Measures a
portfolios rate of return based on the
risk it assumed and is often referred
to as its risk-adjusted performance.
Using Standard Deviation and returns
in excess of the returns of T-bills, it
determines reward per unit of risk.
standard deviation Measures
the volatility associated with a given
investment. The statistic measures
the annualized quarterly variation in
investment returns around the mean
return. Unlike beta, which measures
volatility relative to the aggregate

market, standard deviation measures

the absolute volatility.
stock A type of security that
signifies ownership in a corporation
and represents a claim on part of the
corporations assets and earnings.
There are two main types of stock:
common and preferred. Common
stock usually entitles the owner to
vote at shareholders meetings and
to receive dividends. Preferred stock
generally does not have voting rights,
but has a higher claim on assets and
earnings than the common shares.

strategic asset allocation

A portfolio strategy that involves

setting target allocations for various
asset classes, and periodically
rebalancing the portfolio back to
the original allocations when they
deviate significantly from the initial
settings due to differing returns from
various assets. In strategic asset
allocation, the target allocations
depend on a number of factors such
as the investors risk tolerance, time
horizon and investment objectives
and may change over time as these
parameters change.
tax management Utilizing taxloss harvesting and other techniques
to attempt to minimize tax liabilities
at the portfolio level.
tactical asset allocation An
active management portfolio strategy
that rebalances the percentage of
assets held in various categories in
order to take advantage of market
pricing anomalies or strong market
sectors.
time horizon The amount
of time until the allotted money is
needed. This can typically be one,
five, or even ten years.
time-weighted return A
measure of the compound rate of
growth in a portfolio.
total return Indicates the
short- and long-term investment
returns earned by the fund, along
with the returns of its benchmark
and/or index.

tracking error Represents

the Standard Deviation of the
Excess Return. This provides a
historical measure of the variability
of the funds returns relative to
its benchmark. A fund with a low
Tracking Error would have quarterly
Excess returns that have exhibited
very low volatility.
treasury bills A short-term
debt obligation backed by the US
government with a maturity of
less than one year. Also called
T-bills, Treasury bills are sold in
denominations of $1,000 up to a
maximum purchase of $5 million and
commonly have maturities of one
month (four weeks), three months (13
weeks) or six months (26 weeks).
treasury bonds U.S. Treasury
obligations that mature in more than
ten years.
treasury notes U.S. Treasury
obligations that mature in two to ten
years.
unified managed account

A professionally managed private

investment account that is rebalanced
regularly and can encompass every
investment vehicle (e.g. mutual funds,
stocks, bonds and exchange traded
funds) in an investors portfolio, all in
a single account.
value stocks Stocks that are
trading at a discounted price relative
to the companys perceived worth,
earnings or cash flow.
volatility Fluctuations in the
value of a security or investment
portfolio. Volatility is viewed as a
measurement of an investments risk.
wash sale A transaction where
an investor sells a losing security
to claim a capital loss, only to
repurchase it again for a bargain.

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The S&P 500 Index is widely regarded as the best single gauge of the U.S.
equities market, this world-renowned index includes a representative sample
of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 focuses on the large-cap segment of the market, with
over 80% coverage of U.S. equities, it is also an ideal proxy for the total
market.
The Lipper Large Cap Core Fund Average includes the 30 largest largecap core funds tracked by Lipper Inc. Lipper averages are equally weighted
total returns of all the active funds available in the category. The average
includes net reinvested dividends.
Although the statements of fact and data in this report have been obtained from, and are based upon, sources that the Firm believes to be reliable, we do not guarantee their accuracy, and any such information may

be incomplete or condensed. All opinions included in this report constitute

the Firms judgment as of the date of this report and are subject to change
without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any
security.
Past performance is not a guarantee of future results.
Investing in the market entails the risk of market volaility. The value of all
types of investments may increase or decrease over varying time periods.
Diversification does not assure a profit or protect against loss.
2014 Morgan Stanley Smith Barney LLC, member SIPC. Consulting
Group is a business of Morgan Stanley Smith Barney LLC.

2014-PS-138 2/14

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