An absolute return target is the annual return goal set by an investor after accounting for inflation, expenses, and a desired real return. For instance, if inflation is expected to be 3% per year, and a foundation's expenses represent 1% of its assets each year, that foundation's absolute return target might be 9% to cover these and provide a 5% return.

In its simplest form, Alpha is the value added by an active manager over the benchmark return, or "Beta". For instance, if a large-cap stock manager returns 10%, and the S&P 500 returns 7%, we would say that the alpha generated by the manager was 3% (10% minus 7%).

The market return, as represented by an active manager’s benchmark index. A passive investment strategy (holding the index) earns only beta, whereas an active strategy (picking stocks from the index) attempts to generate “alpha” on top of the index return, or beta.

A blended benchmark is used to measure the relative performance of the entire portfolio against a blend of indices. To take a simple example, if an investor's assets are allocated to 70% stocks and 30% bonds, the portfolio's performance would be measured against a blended benchmark consisting of 70% in a stock index, and 30% in a bond index.

When a company or government borrows money, it issues bonds representing a claim on repayment, much like an IOU. These bonds can then be traded in the public or private markets.

An approach to asset allocation whereby a passive vehicle (the ‘core') is used to gain beta exposure to a certain market segment (for example, small cap value stocks), and that passive exposure is enhanced by the addition of one or more active managers (the ‘satellites'), which are put in place to generate alpha.

The cost value is what an investor paid to purchase an asset. The market value is the price at which the asset is currently being exchanged in the market.

Stock of a company whose operations are located primarily in the U.S.

A private foundation is required to pay an annual federal excise tax (which can require quarterly estimated tax payments) equal to 2% of the foundation’s net investment income. The tax rate for a particular year can be reduced to 1% if the foundation satisfies certain distribution requirements for that year. To be eligible for the reduced tax rate for a particular taxable year, a foundation must make qualifying distributions paid out before the end of that taxable year at least equal to the sum of (i) the foundation’s average distribution ratio for the prior five years multiplied by the value of its current net non-charitable-use assets (as specifically defined) and (ii) one percent of its current year’s net investment income. For purposes of this test, qualifying distributions include grants, reasonable administrative expenses, and certain other expenditures. The test for determining whether the tax rate is reduced from 2% to 1% uses some of the same terms as the separate 5% minimum annual payout requirement but is not the same thing; it is possible to satisfy the 5% payout requirement and yet still have to pay excise tax at the 2% rate.

A hedge fund is a lightly-regulated, private manager of capital that can engage in a wide variety of investment strategies, including short-selling (betting on stocks to go down) and arbitrage (taking advantage of small price discrepancies between two securities), amongst many others. Hedge funds can use borrowed money to enhance their returns. They typically charge a management fee of 1-2% of assets under management, plus an "incentive fee" of 20% of profits made.

An index is a grouping of securities intended to represent a broad segment of the market: for instance, the S&P 500 index is composed of the stocks from the 500 largest companies in the United States, while the Barclays Aggregate Bond Index contains a wide selection of investment-grade bonds. Active investment managers are commonly measured against the index which corresponds to their respective universe. A bond manager, for example, may be compared to the Lehman Aggregate Bond Index in order to determine whether his or her decisions to include or exclude bonds from the portfolio (i.e. active management) resulted in improved performance over simply holding the entire group of bonds (i.e. the index).

A passively-managed fund which holds all the stocks in an index (such as the S&P 500) or is designed to mimic an index.

Stock of a company whose operations are located primarily outside the U.S.

A document which outlines the investor’s return target, comfort level with regard to risk, broad guidelines for asset allocation and/or specific investment mandates (social, etc.). Before implementing an investment plan for a client, the advisor first works with the client to create an IPS to guide that plan.

Stocks of companies with high market capitalizations (in other words, the total value of the company) are called large-cap stocks. Typically, a company with a market cap above $5.0 billion is considered large cap.

Managers that were hired by a client prior to establishing a relationship with a new investment advisor that the client chooses to continue to use for some portion of his or her investment portfolio.

Much like hedge funds, private equity groups are lightly-regulated. They pursue opportunities outside of the public markets (hence the "private" in their name). Within this category, buyout groups purchase all of a company's stock on the public markets and take that company private, looking to re-sell the shares at a later date for a profit, typically after making operational improvements at the company. Venture capital groups invest in small, start-up companies (typically in technology); this is a high risk-reward strategy that aims to make a large profit on a handful of successes that outweighs the larger number of failures.

“Real Estate Investment Trusts”. These are publicly-traded vehicles that invest in equity in or debt related to real estate and enjoy favorable federal tax treatment. A number of "private" (untraded) REITs also exist.

Active managers are typically measured against the index which best represents the stock universe from which their choosing their investments. For instance, a manager that invests in large, U.S.-based companies will usually be measured against the S&P 500 index, which is an index of the 500 largest companies in the U.S.

Conversely, the stocks of companies with market capitalizations below $1.0 billion are typically considered small cap.

A stock is a share of ownership in a company, and represents a claim on the cash flows generated by that company.

The annual percentage rate of return targeted by the investor.

The return on an asset due to price appreciation plus any dividends paid. For example, say an investor buys a stock for $10. If the investor later sells that stock for $12, and received a dividend of $2 while holding the stock, the total return is 40% ($2 gain from price appreciation, plus $2 gain from dividend, divided by the $10 purchase price).

Stocks of companies that are not expected to grow more rapidly than the average typically carry lower valuations and are called value stocks.