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Investing Terms: From Alpha to Zeta (Part 2)

Nominal vs Real Interest Rate:  When you hear someone mention an “interest rate”, they are most often referring to the current market, or nominal interest rate.  Real interest rates are inflation-adjusted rates used in time-value of money calculations such as annuity or retirement calculations.

Rule of 72:  The rule of 72 is a shortcut to estimate the number of years required to double your money at a given annual rate of return. The rule states that you divide the rate, expressed as a percentage, into 72.  Years required to double investment = 72 ÷ compound annual interest rate

Sharpe Ratio:  named after William Sharpe, winner of the 1990 Nobel Memorial Prize in Economic Sciences.

Sharpe was one of the originators of the capital asset pricing model. He created the Sharpe ratio for risk-adjusted investment performance analysis, and he contributed to the development of the binomial method for the valuation of options, the gradient method for asset allocation optimization, and returns-based style analysis for evaluating the style and performance of investment.  The Sharpe ratio can be used to evaluate the total performance of an investment portfolio or the performance of an individual stock. The Sharpe ratio indicates how well an equity investment performs in comparison to the rate of return on a risk-free investment, such as U.S. government treasury bonds or bills.

To calculate the Sharpe ratio, you first calculate the expected return on an investment portfolio or individual stock and then subtract the risk-free rate of return. Then, you divide that figure by the standard deviation of the portfolio or investment.

Time value of money:  a term reflecting the fact that the value (purchasing power) of money in the future will be less than its value today due to inflation.

Technical analysis:  Technical analysis may appear complicated on the surface, but it boils down to an analysis of supply and demand in the market to determine where the price trend is headed. In other words, technical analysis attempts to understand the market sentiment behind price trends rather than analyzing a security’s fundamental attributes.

Total Expense ratio: The total expense ratio (TER) is a measure of the total costs associated with managing and operating an investment fund, such as a mutual fund. These costs consist primarily of management fees and additional expenses, such as trading fees, legal fees, auditor fees and other operational expenses. The total cost of the fund is divided by the fund's total assets to arrive at a percentage amount, which represents the TER, most often referred to as simply "expense ratio."    Fund expenses reduce your return.  For example, if a mutual fund has a one year return of 5%, but has relatively high internal expenses (1%), your net return is 4%.  When evaluating any investment or investment manager, understand the level of fees and how they impact your net return.

VIX:  What is the VIX?  And why do people pay attention it?  The VIX is the Chicago Board of Options Exchange Volatility Index (VIX), designed specifically to track S&P 500 volatility. Most investors familiar with the VIX commonly refer to it as the “fear gauge,” because it has become a proxy for market volatility.

Zeta: number that represents the current theoretical value of a stock or index option based on stock price, option premium, theta (the rate at which the option price changes over time) and some other factors. 

Let’s stop here, since Zeta is getting way complicated for almost all investors.

 

Information provided by Treybourne Wealth Planners should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. 

All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful. 

 

 

 

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