| Portfolio approach | Evaluating each investment by its contribution to the overall portfolio’s risk and return, rather than in isolation. |
| Diversification ratio | σ(equally-weighted portfolio)/σ(randomly selected security). A lower ratio indicates greater diversification benefit. |
| Investment Policy Statement (IPS) | A formal written document that governs the investment process, specifying objectives, constraints, guidelines, and review procedures. |
| Investment objectives | The return and risk goals of the investor, as stated in the IPS. Must be consistent with each other. |
| Investment constraints | Factors limiting investment choices: liquidity, time horizon, taxes, legal/regulatory requirements, and unique circumstances. |
| Strategic Asset Allocation (SAA) | The long-term target allocation across asset classes, derived from the investor’s objectives, constraints, and capital market expectations. |
| Tactical Asset Allocation (TAA) | Short-term deviations from SAA to exploit perceived market opportunities, subject to allowable ranges. |
| Top-down analysis | Investment approach starting from macroeconomic analysis → asset class selection → sector → individual securities. |
| Bottom-up analysis | Investment approach starting from individual security analysis, building the portfolio from the best securities identified. |
| Defined Benefit (DB) plan | A pension plan where the employer promises a specified benefit at retirement (based on salary and years of service). The employer bears investment risk. |
| Defined Contribution (DC) plan | A pension plan where the employer and/or employee make contributions to an individual account. The employee bears investment risk. |
| Endowment | A fund established to provide ongoing financial support (typically for universities, hospitals). Usually has a perpetual time horizon and a spending rule. |
| Sovereign Wealth Fund (SWF) | A state-owned investment fund funded by government surpluses (often commodity revenues), managed for long-term national benefit. |
| Mutual fund (open-end) | A pooled investment vehicle that issues and redeems shares at NAV. Provides diversification and professional management at low minimums. |
| Exchange-Traded Fund (ETF) | A fund trading on an exchange like a stock, using a creation/redemption mechanism to keep price near NAV. Typically lower cost and more tax-efficient than mutual funds. |
| Separately Managed Account (SMA) | An individually owned portfolio managed by a professional; the investor retains direct ownership of the underlying securities. Higher minimums than pooled vehicles. |