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onomewrites

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  1. onomewrites

    INVESTOR SHARES

    What are 'Investor Shares' Investor shares are mutual fund shares structured for investment by individual investors. Investor shares are most commonly offered in open-end mutual funds. BREAKING DOWN 'Investor Shares' Investor shares are one share class available for investment by individual investors in open-end mutual funds. Management investment companies structure open-end mutual funds with multiple share classes and fee levels. Investor shares may also be managed individually in a focused investment fund. Share Classes Any share class available for investment by individual investors can be considered an investor share. Open-end mutual funds can offer a wide range of share classes to different types of investors. Share classes can include A- shares, B-shares, C-shares, R-shares for retirement investing, Z-shares, for employee investment, institutional shares for institutional investors and more. Since open-end mutual funds are pooled investment structures, all of the share class investments in the fund are pooled and managed by the portfolio managers. However, management companies structure each share class offering to have its own fees and sales loads. Fees and Commissions Investor share classes often have the highest expense ratios. They are also typically structured with sales loads also known as commission charges that are paid to intermediary brokers for trades. Management companies partner with intermediaries and distributors to sell investor share classes. These partnerships are usually what cause fees and sales loads to be higher for investor shares in comparison to other share classes in the fund. Investor share classes transacted with full-service brokers will usually have front-end or back - end sales loads. The sales loads for all share classes are detailed in the fund’s prospectus. Each sales load is expressed as a percentage of the investment. Sales loads are charged to the investor and are not part of the fund’s expenses. Investor share class expenses also usually include a 12b-1 fee. This fee is paid from the fund to its distribution network. The 12b-1 fee provides compensation to intermediaries and distributors supporting the overall distribution of the fund. Distribution partnerships are most common in investor share classes. Typically, other shares of the fund such as institutional shares, retirement shares and Z-shares do not involve sales loads. Minimum Investments The minimum investment is also another factor that distinguishes investor shares from institutional shares and other shares in the fund. Minimum investments can vary broadly for funds across different platforms. What is a 'Class of Shares' A class of shares is a type of listed company stock that is differentiated by the level of voting rights shareholders receive. For example, a listed company might have two share classes, or classes of stock, designated as Class A and Class B. Owners of companies that have been privately owned and go public often create class A and B share structures with different voting rights in order to maintain control and/or to make the company a more difficult target for a takeover. BREAKING DOWN 'Class of Shares' Class of shares can also refer to the different share classes that exist for load mutual fund. There are three share classes (Class A, Class B and Class C) which carry different sales charges, 12b-1 fees and operating expense structures. Whether referring to different share classes of a company's stock or the multiple share classes offered by advisor-sold mutual funds, both cases refer to different rights and costs owned by holders of each share class. Mutual Fund Share Classes Advisor-sold mutual funds can have different shares classes with each class owning a unique sales charge and fee structure. Class-A mutual fund shares charge a front-end load, have lower 12b-1 fees and a below-average level of operating expenses. Class-B mutual fund shares charge a back-end load and have higher 12b-1 and operating expenses. Class-C mutual fund shares are considered level-load - there's no front-end load but a low back-end load applies, as do 12b-1 fees and relatively higher operating expenses. The back-end load, known as a contingent deferred sales charge (CDSC) may be reduced or eliminated depending on how long shares have been held. Class-B shares typically have a CDSC that disappears in as little as one year from the date of purchase. Class-C shares often start with a higher CDSC that only fully goes away after a period of 5-10 years. Preferred Class of Shares Investors sometimes opt for an investment in preferred shares, which function as a cross between common stock and fixed income investments. Like common shares, preferred stock has no maturity date, represents ownership in the company and is carried as equity on the company's balance sheet. In comparison to a bond, preferred stock offers a fixed distribution rate, no voting rights and a par value. Preferred shares also rank above common shares in a company's capital structure. Therefore, companies must pay dividends on preferred shares before they pay dividends for classes of common shares. In the event of liquidation or bankruptcy, preferred shareholders will also receive their payment before holders of common stock.
  2. onomewrites

    RETAIL FUND

    RETAIL FUND What is a 'Retail Fund' A retail fund is an investment fund with capital invested by individual investors. Mutual Funds and exchange traded funds (ETFs) are common types of retail funds. BREAKING DOWN 'Retail Fund' Retail funds target the investing interests of individual investors. Closed-end mutual funds and exchange-traded funds are the two most common types of retail funds. These funds do not have share classes and are traded on the open market. Open end mutual funds collectively manage investments from both retail and institutional investors through various share classes. The majority of share classes in an open-end mutual fund are targeted for individual retail investors. Open-end mutual funds do not trade on exchanges with trades managed by the mutual fund company. Retail funds do not have specific investor requirements. In that way they differ from other fund offerings in the market that mandate certain investor requirements. Hedge funds and private market investments for example, may require that an investor be accredited with a specified net worth. Retail Fund Objectives Retail assets account for a significant portion of the market’s total investments. Investment companies offer a wide range of retail fund objectives across all types of asset classes for retail investors. To help investors better understand and analyze retail fund investments, Morningstar developed style boxes for both equity and fixed income funds. Style box analysis can help investors analyze and invest in retail funds with varying levels of risk and potential return. Retail investors can use style box analysis to develop a diversified portfolio of retail funds across multiple investing categories through a brokerage account. Retail Fund Investing Individual investors have a wide range of retail funds to choose from. While retail funds are open to all individual investors, they do have certain transaction costs and minimum investments that must be considered. Individual investors can invest in retail funds through various channels. Mutual funds are traded with the fund company or through an intermediary. Closed-end funds and ETFs can be traded in the open market through an intermediary. Investing through intermediaries requires careful due diligence. Investors will incur sales charges when transacting with full service brokers. Sales charges are determined by the fund company and outlined in a fund’s prospectus. They can range up to 6% of an investor’s investment per transaction. Discount Brokers are often a more cost-efficient way to trade mutual funds. Discount brokers often charge a transaction fee with each block trade. Fund companies work with all types of brokers to determine minimum investment levels required by an investor for investment.
  3. onomewrites

    INVESTMENT FUND

    INVESTMENT FUND An investment fund is a supply of capital belonging to numerous investors used to collectively purchase securities while each investor retains ownership and control of his own shares. An investment fund provides a broader selection of investment opportunities, greater management expertise and lower investment fees than investors might be able to obtain on their own. Types of investment funds include mutual funds, exchange-traded funds, money market funds and hedge funds. BREAKING DOWN 'Investment Fund' With investment funds, individual investors do not make decisions about how a fund's assets should be invested. They simply choose a fund based on its goals, risk, fees and other factors. A fund manager oversees the fund and decides which securities it should hold, in what quantities and when the securities should be bought and sold. An investment fund can be broad-based, or it can be tightly focused, such as an ETF that invests only in small technology stocks. Open-end vs. Closed-end The majority of investment fund assets belong to open-end mutual fund. These funds issue new shares as investors add money to the pool and retire shares as investors redeem. These funds are typically priced just once at the end of the trading day. Closed-end funds trade more similarly to stocks than open-end funds. Closed-end funds are managed investment funds that issue a fixed number of shares, and trade on an exchange. While a net asset value (NAV) for the fund is calculated, the fund trades based on investor supply and demand. Therefore, a closed-end fund may trade at a premium or a discount to its NAV. Investment Funds: Hedge Funds A hedge fund is another type of fund that pairs stocks it wants to shorts (bet will decrease) with stocks it expects to go up in order to decrease the potential for loss. Hedge funds also tend to invest in riskier assets in addition to stocks, bonds, ETFs, commodities and alternative assets. These include derivatives such as futures and options that may also be purchased with leverage or borrowed money.
  4. onomewrites

    CASH VALUE LIFE INSURANCE

    What is 'Cash-Value Life Insurance' Cash-value life insurance is a type of life insurance policy that pays out upon the policyholder's death, and also accumulates value during the policyholder's lifetime. The policyholder can use the cash value as a tax-sheltered investment (the interest and earnings on the policy are not taxable), as a fund from which to borrow and as a means to pay policy premiums later in life, or they can pass it on to their heirs. Cash-value life insurance is a type of life insurance policy that pays out upon the policyholder's death, and also accumulates value during the policyholder's lifetime. The policyholder can use the cash value as a tax-sheltered investment (the interest and earnings on the policy are not taxable), as a fund from which to borrow and as a means to pay policy premiums later in life, or they can pass it on to their heirs BREAKING DOWN 'Cash-Value Life Insurance' Whole life, variable life and universal life are all types of cash-value life insurance. Cash-value insurance is also known as permanent life insurance because it provides coverage for the policyholder's entire life. The other major category of life insurance is called term insurance, because it is generally in force only for a period of 10 to 30 years or until the policyholder cancels it. Cash-value insurance has higher premiums than term insurance because part of the premium pays for the death benefit coverage and part of it goes toward the policy's cash value. How Cash-Value Life Insurance Works Cash-value life insurance is designed as a permanent form of life insurance that includes a death benefit component and a savings component. Most cash-value life insurance policies require a fixed level premium payment, a portion of which is applied to insurance costs with the balance deposited into a cash-value account. The cash-value account earns a modest rate of interest which is allowed to accumulate tax-free. Over time, the cash-value account grows, which reduces the mortality risk of the life insurer. That is because, upon the death of the insured, the insurer is only obligated to pay the death benefit, not the cash value, which it retains. The decreasing mortality risk is also the reason why the insurer is able to guarantee a fixed, level premium for the life of the insured. Cash-Value as a Living Benefit Owners of a cash-value life insurance policy can benefit from savings that accumulate in the cash-value account. Cash-value savings can be accessed in a number of ways. With some types of policies, the cash value can be withdrawn. Withdrawals are tax-free to the extent they don’t exceed the total amount of premiums deposited into the policy. However, withdrawals can have the effect of decreasing the death benefit amount. Most cash-value policies allow for loans to be taken from the cash-value. Loans will also decrease the death benefit amount. Although there is no requirement for the loans to be repaid, the death benefit is reduced by the loan amount. Loans do accrue interest, which can reduce both the cash-value balance and the death benefit further. Cash-value can also be used to pay the policy premiums. If there is sufficient cash-value, a policyholder can stop paying for premiums out-of-pocket for the life of the policy.
  5. onomewrites

    Types of Life Insurance

    Types of Life Insurance Life insurance protection comes in many forms, and not all policies are created equal, as you will soon discover. While the death benefit amounts may be the same, the costs, structure, durations, etc. vary tremendously across the types of policies. Whole Life whole life insurance provides guaranteed insurance protection for the entire life of the insured, otherwise known as permanent coverage. These policies carry a "cash value" component that grows tax deferred at a contractually guaranteed amount (usually a low interest rate) until the contract is surrendered. The premiums are usually level for the life of the insured and the death benefit is guaranteed for the insured's lifetime. Any withdrawal you make will typically be tax free up to the amount of premiums you have paid into the policy minus any prior dividends paid or previous withdrawals. Because of their permanent protection, these policies tend to have a much higher initial premium than other types of life insurance. Universal Life Insurance Universal Life Insurance resembles whole life in that it is also a permanent policy providing cash value benefits based on current interest rates. However, the premiums, cash values and level amount of protection can each be adjusted up or down during the contract term as the insured's needs change. Cash values earn an interest rate that is set periodically by the insurance company and is generally guaranteed not to drop below a certain level. Variable Universal Life Variable Universal Life Insurance gives the consumer the flexibility of a universal policy along with a selection of investment choices. The mutual fund sub accounts in these policies are technically classified as securities and are therefore subject to Securities and Exchange Commission (SEC) regulation and the oversight of the state insurance commissioner. The investment risk in these policies lies with the policy owner; as a result, the death benefit value may rise or fall depending on the success of the policy's underlying investments. However, policies may provide some type of guarantee that at least a minimum death benefit will be paid to beneficiaries. Term Life One of the most commonly used policies is term life insurance. It pays the face amount of the policy, but only provides protection for a definite, but limited, amount of time. Term policies do not build cash values and the maximum term period is usually 30 years. They are useful when there is a limited time needed for protection and when the dollars available for coverage are limited. The premiums for these types of policies are significantly lower than for any type of cash value policy. They also (initially) provide more insurance protection per dollar spent than any type of permanent policy. However, the cost of premiums increases as the policy owner gets older and as the end of the specified term nears. Term polices can have some variations, including, but not limited to: Annual Renewable and Convertible Term: This policy provides protection for one year but allows the insured to renew the policy for successive periods thereafter, but at higher premiums without having to furnish evidence of insurability. These policies may also be converted into whole life policies without any additional underwriting. Level Term: This policy has an initial guaranteed premium level for specified periods; the longer the guarantee, the greater the cost to the buyer (but usually still far more affordable than permanent policies). These policies may be renewed after the guarantee period, but the premiums do increase as the insured gets older. Decreasing Term: This policy has a level premium, but the amount of the death benefit decreases with time. This is often used in conjunction with mortgage or other debt protection. Many term life insurance policies have major features that provide additional flexibility for the insured/policyholder. A renewability feature, perhaps the most important feature associated with term policies, guarantees that the insured can renew the policy for a limited number of years (i.e., a term between five and 30 years) based on attained age. Convertibility provisions permit the policy owner to exchange a term contract for permanent coverage within a specific time frame without providing additional evidence of insurability. Of course, these provisions will raise the policy premiums accordingly. The Bottom Line Many insurance consumers only need to replace their income until they've reached retirement age, have accumulated a fair amount of wealth, or their dependents are old enough to take care of themselves. When evaluating life insurance policies for you and your family, you must carefully consider the purchase of temporary versus permanent coverage. There are many differences in how policies may be structured and how death benefits are determined, as well as how they are priced and their duration. Many consumers opt to buy term insurance as a temporary risk protection and then invest the savings (the difference between the cost of term and what they would have paid for permanent coverage) in a brokerage account mutual fund or retirement plan. In some cases, this is a good idea, but it is not necessarily always the best option, especially for those who must rely on at least a certain amount of coverage when they die.
  6. onomewrites

    Basics of Life Insurance

    Life Insurance: The Basics Life insurance was initially designed to protect the income of families, particularly young families in the wealth accumulation phase, in the event of the head of household's death. Today it is used for many reasons, including wealth preservation and estate tax planning. Of course, it still provides you with the opportunity to protect yourself and your family from personal risk exposures like repayment of debts after death, providing for a surviving spouse and children and fulfill other financial goals such as college funding, leaving a charitable legacy or paying for funeral expenses. Life insurance protection is also important if you are a business owner or a key person in someone else's business, where your death (or your partner's death) could prevent the business from continuing its operation. One of the key benefits from any type of life insurance is that the death benefit that is paid out is always tax free. All life insurance policies involve four separate parties: the insurance carrier, the policy owner who pays the premiums, the insured upon whose death the policy will pay out and the beneficiary who receives the death benefit proceeds. Who Needs It? Not everybody needs life insurance. If you are single and have no dependents, it may not be worth the expense. If, however, you have anyone who financially depends on you (even partially), life insurance may be appropriate for you. When considering life insurance, ask yourself the following questions: Do I need life insurance? How much do I need? How long will I need it? What type of policy makes sense for me? Your need for life insurance will depend on your personal circumstances, including your current income, your current expenses, your current savings and debt and your family's goals. Many planners recommend coverage equal to at least six to 10 times your gross annual income, but your or your family's needs may differ from that. You will have to compare the what you have versus what goals you'd like for your family once you are gone, keeping in mind that their security can often carry a higher price tag than you originally thought.
  7. onomewrites

    DEBT & EQUITY INVESTMENTS

    DEBT & EQUITY INVESTMENTS What Are the Differences between Debt & Equity Investments While both debt and equity investments can deliver good returns, they have differences with which you should be aware. Debt investments, such as bonds and mortgages, specify fixed payments, including interest, to the investor. Equity investments, such as stock, are securities that come with a "claim" on the earnings and/or assets of the corporation. Common stock, as traded on the New York or other stock exchanges, is the most popular equity investment. Debt and equity investments come with different historical returns and risk levels. DEBT INSTRUMENTS Debt investments tend to be less risky than equity investments but usually offer a lower but more consistent return. They are less volatile than common stocks, with fewer highs and lows than the stock market. The bond and mortgage market historically experiences fewer price changes, for better or worse, than stocks. Also, should a corporation be liquidated, bondholders are paid first. Mortgage investments, like other debt instruments, come with stated interest rates and are backed up by real estate collateral. EQUITY INVESTMENTS Fortunes can be made or lost with equity investments. Any stock market can be volatile, with rapid changes in share values. Often, these wide price swings are not based on the solidity of the organization backing them up but by political, social or governmental issues in the home country of the corporation. Equity investments are a classic example of taking on higher risk of loss in return for potentially higher reward. LEGAL DIFFERENCES Debt instruments, whatever they may be called, are corporate borrowing. Instead of procuring a straight commercial bank loan, the organization "borrows" from a variety of investors. This is why debt instruments, such as bonds, come with a stated interest rate, as a loan would. Equity investments offer an ownership position in the company. Owning stock makes the investor an owner of the organization. The percentage of ownership depends on the number of shares owned as compared with the total number of shares issued by the corporation. INVESTMENTS GOALS AND RISKS Depending on your investment goals, these differences may strongly influence your preferences. All investments come with risk. However, debt instruments offer less risk than equity investments. Your investing targets may favor equity investments, if you're seeking striking growth or profit potential. Conversely, you might focus on debt instruments when you prefer consistent income and less risk. Tailor your investment actions to match your objectives and risk tolerance.
  8. onomewrites

    DEBT & EQUITY INVESTMENTS

    DEBT & EQUITY INVESTMENTS What Are the Differences between Debt & Equity Investments While both debt and equity investments can deliver good returns, they have differences with which you should be aware. Debt investments, such as bonds and mortgages, specify fixed payments, including interest, to the investor. Equity investments, such as stock, are securities that come with a "claim" on the earnings and/or assets of the corporation. Common stock, as traded on the New York or other stock exchanges, is the most popular equity investment. Debt and equity investments come with different historical returns and risk levels. DEBT INSTRUMENTS Debt investments tend to be less risky than equity investments but usually offer a lower but more consistent return. They are less volatile than common stocks, with fewer highs and lows than the stock market. The bond and mortgage market historically experiences fewer price changes, for better or worse, than stocks. Also, should a corporation be liquidated, bondholders are paid first. Mortgage investments, like other debt instruments, come with stated interest rates and are backed up by real estate collateral. EQUITY INVESTMENTS Fortunes can be made or lost with equity investments. Any stock market can be volatile, with rapid changes in share values. Often, these wide price swings are not based on the solidity of the organization backing them up but by political, social or governmental issues in the home country of the corporation. Equity investments are a classic example of taking on higher risk of loss in return for potentially higher reward. LEGAL DIFFERENCES Debt instruments, whatever they may be called, are corporate borrowing. Instead of procuring a straight commercial bank loan, the organization "borrows" from a variety of investors. This is why debt instruments, such as bonds, come with a stated interest rate, as a loan would. Equity investments offer an ownership position in the company. Owning stock makes the investor an owner of the organization. The percentage of ownership depends on the number of shares owned as compared with the total number of shares issued by the corporation. INVESTMENTS GOALS AND RISKS Depending on your investment goals, these differences may strongly influence your preferences. All investments come with risk. However, debt instruments offer less risk than equity investments. Your investing targets may favor equity investments, if you're seeking striking growth or profit potential. Conversely, you might focus on debt instruments when you prefer consistent income and less risk. Tailor your investment actions to match your objectives and risk tolerance.
  9. onomewrites

    Life Insurance

    LIFE INSURANCE What is 'Life Insurance' Life insurance is a protection against financial loss that would result from the premature death of an insured. The named beneficiary receives the proceeds and is thereby safeguarded from the financial impact of the death of the insured. The death benefit is paid by a life insurer in consideration for premium payments made by the insured. BREAKING DOWN 'Life Insurance' The goal of life insurance is to provide a measure of financial security for your family after you die. So, before purchasing a life insurance policy, consider your financial situation and the standard of living you want to maintain for your dependents or survivors. For example, who will be responsible for your funeral costs and final medical bills? Would your family have to relocate? Will there be adequate funds for future or ongoing expenses such as daycare, mortgage payments and college? It is prudent to re-evaluate your life insurance policies annually or when you experience a major life event like marriage, divorce, the birth or adoption of a child, or purchase of a major item such as a house or business. How Life Insurance Works Life insurance is a contract between an individual with an insurable interest and a life insurance company to transfer the financial risk of a premature death to the insurer in exchange for a specified amount of premium. The three main components of the life insurance contract are a death benefit, a premium payment and, in the case of permanent life insurance, a cash value account. Death Benefit: The death benefit is the amount of money the insured’s beneficiaries will receive from the insurer upon the death of the insured. Although the death benefit amount is determined by the insured, the insurer must determine whether there is an insurable interest and whether the insured can qualify for the coverage based on its underwriting requirements. Premium Payment: Using actuarially based statistics, the insurer determines the amount of premium it needs to cover mortality costs. Factors such as the insured’s age, personal and family medical history, and lifestyle are the main risk determinants. As long as the insured pays the premium as agreed, the insurer remains obligated to pay the death benefit. For term policies, the premium amount includes the cost of insurance. For permanent policies, the premium amount includes the cost of insurance plus an amount that is deposited to a cash value account. Cash Value: Permanent life insurance includes a cash value component which serves two purposes. It is a savings account that allows the insured to accumulate capital that can become a living benefit. The capital accumulates on a tax-deferred basis and can be used for any purpose while the insured is alive. It is also used by the insurer to mitigate its risk. As the cash value accumulates, the amount the insurer is at risk for the entire death benefit decreases, which is how it is able to charge a fixed, level premium.
  10. onomewrites

    Asset allocation

    Asset Allocation In simple terms, asset allocation refers to the balance between growth-oriented and income-oriented investments in a portfolio. This allows the investor to take advantage of the risk/reward tradeoff and benefit from both growth and income. Here are the basic steps to asset allocation: 1. Choosing which asset classes to include (stocks, bonds, money market, real estate, precious metals, etc.) 2. Selecting the ideal percentage (the target) to allocate to each asset class 3. Identifying an acceptable range within that target 4. Diversifying within each asset class. Risk Tolerance The client's risk tolerance is the single most important factor in choosing an asset allocation. At times, there may be a distinct difference between the risk tolerance of a client and his/her spouse, so care must be taken to get agreement on how to proceed. Also, risk tolerance may change over time, so it's important to revisit the topic periodically. Time Horizon Clearly, the time horizon for each of the client's goals will affect the asset allocation mix. Take the example of a client with a very aggressive risk tolerance. The recommended allocation to stocks will be much higher for the client's retirement portfolio than for the money being set aside for the college fund of the client's 13-year-old child.
  11. onomewrites

    Concept of Risk and Reward

    CONCEPT OF RISK VS REWARD Measuring Portfolio Risk One of the concepts used in risk and return calculations is standard deviation which measures the dispersion of actual returns around the expected return of an investment. Since standard deviation is the square root of the variance, this is another crucial concept to know. The variance is calculated by weighting each possible dispersion by its relative probability (take the difference between the actual return and the expected return, then square the number). The standard deviation of an investment's expected return is considered a basic measure of risk. If two potential investments had the same expected return, the one with the lower standard deviation would be considered to have less potential risk. Risk Measures There are three other risk measures used to predict volatility and return: Alpha - this measures stock price volatility based on the specific characteristics of the particular security. As with beta, the higher the number, the higher the risk. Sharpe ratio- this is a more complex measure that uses the standard deviation of a stock or portfolio to measure volatility. This calculation measures the incremental reward of assuming incremental risk. The larger the Sharpe ratio, the greater the potential return. The formula is: Sharpe Ratio = (total return minus the risk-free rate of return) divided by the standard deviation of the portfolio. Beta- this measures stock price volatility based solely on general market movements. Typically, the market as a whole is assigned a beta of 1.0. So, a stock or a portfolio with a beta higher than 1.0 is predicted to have a higher risk and, potentially, a higher return than the market. Conversely, if a stock (or fund) had a beta of .85, this would indicate that if the market increased by 10%, this stock (or fund) would likely return only 8.5%. However, if the market dropped 10%, this stock would likely drop only 8.5%.
  12. onomewrites

    Concept of Rish and Reward

    CONCEPT OF RISK VS REWARD Measuring Portfolio Risk One of the concepts used in risk and return calculations is standard deviation which measures the dispersion of actual returns around the expected return of an investment. Since standard deviation is the square root of the variance, this is another crucial concept to know. The variance is calculated by weighting each possible dispersion by its relative probability (take the difference between the actual return and the expected return, then square the number). The standard deviation of an investment's expected return is considered a basic measure of risk. If two potential investments had the same expected return, the one with the lower standard deviation would be considered to have less potential risk. Risk Measures There are three other risk measures used to predict volatility and return: Alpha - this measures stock price volatility based on the specific characteristics of the particular security. As with beta, the higher the number, the higher the risk. Sharpe ratio- this is a more complex measure that uses the standard deviation of a stock or portfolio to measure volatility. This calculation measures the incremental reward of assuming incremental risk. The larger the Sharpe ratio, the greater the potential return. The formula is: Sharpe Ratio = (total return minus the risk-free rate of return) divided by the standard deviation of the portfolio. Beta- this measures stock price volatility based solely on general market movements. Typically, the market as a whole is assigned a beta of 1.0. So, a stock or a portfolio with a beta higher than 1.0 is predicted to have a higher risk and, potentially, a higher return than the market. Conversely, if a stock (or fund) had a beta of .85, this would indicate that if the market increased by 10%, this stock (or fund) would likely return only 8.5%. However, if the market dropped 10%, this stock would likely drop only 8.5%.
  13. onomewrites

    Concept of Rish and Reward

    CONCEPT OF RISK VS REWARD Measuring Portfolio Risk One of the concepts used in risk and return calculations is standard deviation which measures the dispersion of actual returns around the expected return of an investment. Since standard deviation is the square root of the variance, this is another crucial concept to know. The variance is calculated by weighting each possible dispersion by its relative probability (take the difference between the actual return and the expected return, then square the number). The standard deviation of an investment's expected return is considered a basic measure of risk. If two potential investments had the same expected return, the one with the lower standard deviation would be considered to have less potential risk. Risk Measures There are three other risk measures used to predict volatility and return: Alpha - this measures stock price volatility based on the specific characteristics of the particular security. As with beta, the higher the number, the higher the risk. Sharpe ratio- this is a more complex measure that uses the standard deviation of a stock or portfolio to measure volatility. This calculation measures the incremental reward of assuming incremental risk. The larger the Sharpe ratio, the greater the potential return. The formula is: Sharpe Ratio = (total return minus the risk-free rate of return) divided by the standard deviation of the portfolio. Beta- this measures stock price volatility based solely on general market movements. Typically, the market as a whole is assigned a beta of 1.0. So, a stock or a portfolio with a beta higher than 1.0 is predicted to have a higher risk and, potentially, a higher return than the market. Conversely, if a stock (or fund) had a beta of .85, this would indicate that if the market increased by 10%, this stock (or fund) would likely return only 8.5%. However, if the market dropped 10%, this stock would likely drop only 8.5%.
  14. THINGS TO KNOW ABOUT ASSET ALLOCATION 3. Determine Your Long- and Short-Term Goals We all have our goals. Whether you aspire to build a fat retirement fund, own a yacht or vacation home, pay for your child's education or simply save for a new car, you should consider it in your asset-allocation plan. All these goals need to be considered when determining the right mix. For example, if you're planning to own a retirement condo on the beach in 20 years, you don't have to worry about short-term fluctuations in the stock market. But if you have a child who will be entering college in five to six years, you may need to tilt your asset allocation to safer fixed-income investments. And as you approach retirement, you may want to shift to a higher proportion of fixed income investments to equity holdings. 4. Time Is Your Best Friend The Department of Labor has said that for every ten years you delay saving for retirement (or some other long-term goal), you will have to save three times as much each month to catch up. Having time not only allows you to take advantage of compounding and the time value for money, it also means you can put more of your portfolio into higher risk/return investments, namely stocks. A couple of bad years in the stock market will likely show up as nothing more than some insignificant blip 30 years from now. 5. Just Do It! Once you've determined the right mix of stocks, bonds and other investments, it's time to implement it. The first step is to find out how your current portfolio breaks down. It's fairly straightforward to see the percentage of assets in stocks versus bonds, but don't forget to categorize what type of stocks you own (small, mid or large cap). You should also categorize your bonds according to their maturity (short, mid or long term). Mutual funds can be more problematic. Fund names don't always tell the entire story. You have to dig deeper in the prospectus to figure out where fund assets are invested. The Bottom Line There is no single solution for allocating your assets. Individual investors require individual solutions. Furthermore, if a long-term horizon is something you don't have, don't worry. It's never too late to get started. It's also never too late to give your existing portfolio a face-lift. Asset allocation is not a one-time event, it's a life-long process of progression and fine-tuning.
  15. THINGS TO KNOW ABOUT ASSET ALLOCATION 3. Determine Your Long- and Short-Term Goals We all have our goals. Whether you aspire to build a fat retirement fund, own a yacht or vacation home, pay for your child's education or simply save for a new car, you should consider it in your asset-allocation plan. All these goals need to be considered when determining the right mix. For example, if you're planning to own a retirement condo on the beach in 20 years, you don't have to worry about short-term fluctuations in the stock market. But if you have a child who will be entering college in five to six years, you may need to tilt your asset allocation to safer fixed-income investments. And as you approach retirement, you may want to shift to a higher proportion of fixed income investments to equity holdings. 4. Time Is Your Best Friend The Department of Labor has said that for every ten years you delay saving for retirement (or some other long-term goal), you will have to save three times as much each month to catch up. Having time not only allows you to take advantage of compounding and the time value for money, it also means you can put more of your portfolio into higher risk/return investments, namely stocks. A couple of bad years in the stock market will likely show up as nothing more than some insignificant blip 30 years from now. 5. Just Do It! Once you've determined the right mix of stocks, bonds and other investments, it's time to implement it. The first step is to find out how your current portfolio breaks down. It's fairly straightforward to see the percentage of assets in stocks versus bonds, but don't forget to categorize what type of stocks you own (small, mid or large cap). You should also categorize your bonds according to their maturity (short, mid or long term). Mutual funds can be more problematic. Fund names don't always tell the entire story. You have to dig deeper in the prospectus to figure out where fund assets are invested. The Bottom Line There is no single solution for allocating your assets. Individual investors require individual solutions. Furthermore, if a long-term horizon is something you don't have, don't worry. It's never too late to get started. It's also never too late to give your existing portfolio a face-lift. Asset allocation is not a one-time event, it's a life-long process of progression and fine-tuning.
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