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Author: jbking Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 2205  
Subject: Re: Please Help! Date: 7/2/2002 6:10 PM
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Greetings Tavano,

I've been desperately trying to find a financial (investing) terms glossary

There are some like www.investorwords.com and www.investopedia.com that may usually give answers that may be a starting point although some sites may also have glossaries lie http://www.fool.com/school/Glossary/glossary.htm for example.

I'd be aware that some of the terms you list are commonly found in statistical texts like beta coefficient, alpha, standard deviation, R2 and thus while I may give a general definition the actual formula used may vary as well as what time frame of data is used.

beta coefficient, R2

These are actually more statistical in origin although there are financial uses for them. Beta coefficient likely refers to the slope of a linear regression model I think. IOW, this is the mulitplier of how volitile an investment is compared to some benchmark such as the S & P 500 typically although one could use any index. A multiplier of 1 means that the investment is just as volitile while less than 1 implies lower volitility and more than one higher volitility on a geometric scale, e.g. a mulitplier .5 implies 50% volitility while a 2 is 100% more volitility than the market.

R2 is likely R-squared or R^2 which is a meausure of co-relation so that you can determine how often the investments moves of one determine the moves of the other.

Another pair of definitions about these from Morningstar found at http://quicktake.morningstar.com/DataDefs/FundRatingsAndRisk.html :
"R-Squared vs. Standard Index
R-squared ranges from 0 to 100 and reflects the percentage of a fund's movements that are explained by movements in its benchmark index. An R-squared of 100 means that all movements of a fund are completely explained by movements in the index. Thus, index funds that invest only in S&P 500 stocks will have an R-squared very close to 100. Conversely, a low R-squared indicates that very few of the fund's movements are explained by movements in its benchmark index. An R-squared measure of 35, for example, means that only 35% of the fund's movements can be explained by movements in its benchmark index. Therefore, R-squared can be used to ascertain the significance of a particular beta or alpha. Generally, a higher R-squared will indicate a more useful beta figure. If the R-squared is lower, then the beta is less relevant to the fund's performance.

Beta vs. Standard Index
Beta, a component of Modern Portfolio Theory statistics, is a measure of a fund's sensitivity to market movements. It measures the relationship between a fund's excess return over T-bills and the excess return of the benchmark index. Equity funds are compared with the S&P 500 index; bond funds are compared with the Lehman Brothers Aggregate Bond index. Morningstar calculates beta using the same regression equation as the one used for alpha, which regresses excess return for the fund against excess return for the index. This approach differs slightly from other methodologies that rely on a regression of raw returns.

By definition, the beta of the benchmark (in this case, an index) is 1.00. Accordingly, a fund with a 1.10 beta has performed 10% better than its benchmark index--after deducting the T-bill rate--than the index in up markets and 10% worse in down markets, assuming all other factors remain constant. Conversely, a beta of 0.85 indicates that the fund has performed 15% worse than the index in up markets and 15% better in down markets. A low beta does not imply that the fund has a low level of volatility, though; rather, a low beta means only that the funds market-related risk is low. A specialty fund that invests primarily in gold, for example, will often have a low beta (and a low R-squared), relative to the S&P 500 index, as its performance is tied more closely to the price of gold and gold-mining stocks than to the overall stock market. Thus, though the specialty fund might fluctuate wildly because of rapid changes in gold prices, its beta relative to the S&P may remain low. "

Treynor

Well, there is a Treynor index which www.investorwords.com defines as, "A measure of a portfolio's excess return per unit of risk, equal to the portfolio's rate of return minus the risk-free rate of return, divided by the portfolio's beta. "

standard deviation

"A statistical measure of the historical volatility of a mutual fund or portfolio, usually computed using 36 monthly returns. More generally, a measure of the extent to which numbers are spread around their average. " is the www.investorwords.com definition although I imagine a book on statistics should have a similar definition as given by http://www.intelligencetest.com/stan-deviation.htm

portable alpha

Although I've never heard of this term, I would infer that the alpha is other component from the linear regression model described above and that by "portable" this either refers to it being moveable OR that is bearable in terms of how low a threshold would an investor accept for a given investment model.

tactical asset allocation

Given a meaning of tactical as, "adroit in planning or maneuvering to accomplish a purpose" from www.m-w.com and asset alllocation being a way of distributing capital amongst asset classes this is merely maneuvering from one asset class to another which is likely done to achieve high returns. If you want a mutual fund that employs this look up Vanguard Asset Allocation which has a ticker of VAAPX.

Anymore terms?

Regards,
JB
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