Financial Terms

The following are some key terms and concepts commonly used in the financial industry. 

Asset Allocation

An investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individuals goals, risk tolerance and investment horizon.  The three main asset classes - equities, fixed-income, and cash and equivalents - have different levels of risk and return, so each will behave differently over time.

Compound Returns

The ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings.  Overtime the effects of compounding can be significant.

Correlation

A statistical measure of how the price of two securities move in relation to each other.  Correlation is important when deciding which investments to include together in your portfolio.

Diversification

Diversification strives to smooth out returns in a portfolio so that the positive performance of some investments will neutralize the negative performance of others.  Therefore, the benefits of diversification will only help if the investments in the portfolio are not perfectly correlated.

Real Return

A return figure which has been adjusted for inflation.  

Standard Deviation

A measure of the dispersion of returns from an investment's average return .  Standard deviation is also known as historical volatility and is used by investors as a gauge for the amount of expected volatility.

Time Value of Money

The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.

Volatility

A measure of the price changes of a financial instrument over time.