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Putnam glossary of investment terms
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Putnam glossary of investment terms

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  • 1. Putnam’s glossary Investor Educationof common investment termsActive share is the percentage of a fund’s holdings that Down-market capture ratio is used to evaluate howdiffers from the benchmark index. A high active share well a fund has performed relative to an index duringresults from overweighting and underweighting a periods when that index has declined. The ratio isportfolio’s holdings versus the benchmark index and calculated by dividing the fund’s returns by the returnsby holding positions not in the benchmark index. of the index during the down market and multiplying that factor by 100. A down-market capture ratio of lessAlpha is a measure of risk-adjusted performance. than 100% means the fund has lost less than the indexA positive alpha means the fund’s risk-adjusted returns during down markets.have been higher than those of its benchmark; a negativealpha means the returns have been lower. Duration measures the sensitivity of bond prices to interest-rate changes and is expressed in years. A nega-Beta measures the volatility of a fund in relation to the tive duration indicates that a security or fund may befund’s benchmark. A beta of less than 1.0 indicates lower poised to increase in value when interest rates increase.volatility than the benchmark; a beta of more than 1.0indicates higher volatility. Futures contracts are exchange-traded financial contracts obligating a party to buy or sell an asset at aCorrelation is a measure of how similar the historical predetermined date and price. The underlying asset canperformances of two different asset classes have been. be any number of financial instruments, including stocks,The maximum correlation is 1.0 and the minimum is bonds, or commodities. Futures are generally used either–1.0. A positive correlation close to 1.0 indicates that the as a hedge for future price fluctuations or to gain exposurehistorical returns of the two asset classes being compared to the underlying asset. Treasury futures are among thehave been very similar. A negative correlation close to most heavily traded futures contracts, and are tied to the–1.0 indicates that the historical returns of the two asset performance of the underlying Treasury bonds. Becauseclasses being compared have been opposite each other. the price of U.S. Treasuries is driven primarily by changesFor example, when one gained 5%, the other declined 5%. in interest rates, Treasury futures can be an efficient wayCorrelations near zero indicate that there has been little to hedge interest-rate risk or establish an investment posi-discernible relationship between the two asset classes tion based on views of future rate levels.being compared. Information ratio is a risk-adjusted measure of fundDistribution yield represents the annual interest or divi- performance relative to benchmark performance. It isdend distributions paid on an investment expressed as calculated by dividing the average excess return of a funda percentage of the investment’s price. Prices and yields over a benchmark by the fund’s tracking error over a givenmove in opposite directions: When prices go up, yields go period. A higher information ratio means better funddown, and vice versa. performance relative to benchmark performance on a risk-adjusted basis. (over, please)
  • 2. Risk parity is an investment strategy through which amulti-asset portfolio manager seeks to establish parityamong the contributions of each asset class to theportfolio’s total risk profile. Risk parity strategies typicallyhave smaller allocations to equities than traditional assetallocation strategies and use leverage to seek to increasethe returns of less volatile asset classes, such as bonds.SEC yield is a standardized measure developed by theSecurities and Exchange Commission for comparingthe yields of fixed-income portfolios. The SEC yield is anannualized figure based on the income, net of expenses,that a portfolio generates over a certain period of time —typically seven days for money market funds and 30 daysfor bond funds.Sharpe ratio is a measure of risk-adjusted performance.It is calculated by subtracting the risk-free rate of return(as measured by Treasury bills) from the fund’s return, anddividing that figure by the standard deviation of the fund’sreturn. The higher the ratio, the better the fund’s returnper unit of risk taken.Swaps are contractual agreements between two partiesto exchange, or “swap,” financial instruments. The mostcommon variety of swap is an interest-rate swap, bywhich one party typically trades cash flows on a variableor floating interest rate in exchange for the cash flows ona fixed interest rate. Interest-rate swaps are a commonmeans for helping to offset the risk of rising interest rates.Up-market capture ratio is used to evaluate how well afund has performed relative to an index during periodswhen that index has risen. The ratio is calculated bydividing the fund’s returns by the returns of the indexduring the up market, and multiplying that factor by 100.An up-market capture ratio of more than 100% means thefund has gained more than the index during up markets.Yield curve is a graph that plots the yields of bonds withequal credit quality against their differing maturity dates,ranging from shortest to longest. � Putnam Retail ManagementPutnam Investments | One Post Office Square | Boston, MA 02109 | putnam.com�II933 279787 2/13

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