>

Glossary M through O M Major medical insurance A type of medical insurance developed to meet the need for protection against a broad range of catastrophic medical expenses, whether incurred in or out of the hospital. The major medical expense benefit usually is subject to a deductible. Management fee The charge made by an investment adviser for supervision of a portfolio. Frequently includes various other services and is usually a fixed or declining percentage of average assets at market value. Margin The amount of money paid by investors when they use their broker's credit to buy a security. Marital deduction The deduction allowed for gift tax and estate tax purposes for qualifying property transferred to the spouse. Market A public place where goods and services are traded, purchased and sold. Market risk The market as a whole for an asset may decline, as in the financial crises of 1929 and 1987 and in other economic recessions. Market timing A strategy, based on various economic or stock market indicators, for deciding when to buy or sell securities. Marketability The ability to buy or sell a security quickly, without consideration for loss. Market value The current price of an asset, as indicated by the most recent price at which the asset was traded on the open market. Maturity The date on which a debt instrument (bond) must be repaid. Mean-variance optimization Based on an approach to asset allocation developed by Harry Markowitz in the 1950s, whose goal is to provide the maximum return for a given risk or a given return for the minimum risk. Modern Portfolio Theory A theory of managing investment risk proven by Harry Markowitz in 1955 and refined by William Sharpe. The underlying theory of asset allocation, which holds that diversification of investments among more than one asset class with opposite historical performance (negative correlation) helps to maximize return and minimize risk. Money market deposit account Market-sensitive bank account that has been offered since December 1982. The funds are liquid, that is, they are available to depositors at any time without penalty. The interest rate is generally comparable to rates on money market mutual funds. Money market fund A fund that invests in various short-term debt instruments (i.e., commercial paper, negotiable certificates of deposit, banker's acceptances, Treasury bills, etc.). Shares seek to maintain a net asset value of $1 but the interest rate changes daily. Mortgage-backed security Security collateralized by mortgages that are issued by federal, state and local government agencies and private institutions. Designed to be long-term investments. Municipal bond A bond issued by a state, state agency, or authority, or a political subdivision (county, city, town or village). In general, interest paid on municipal bonds is exempt from federal income taxes and from state and local income taxes within the state of issue. Municipal bond fund Unit investment trust or open-end company whose shares represent diversified holding of tax-exempt securities, the income from which is exempt from federal taxes. Mutual fund A fund established by an investment management company to invest the pooled money of individual shareholders in a diversified portfolio of securities selected to meet stated goals (for example, current income, capital growth). New shares are sold and outstanding shares redeemed on demand; all transactions are made at the fund's net asset value, which fluctuates daily. Funds offer their shareholders diversification, liquidity and professional management. N Negative correlations Investments that react in generally opposite ways to changes in the economy are said to have negative correlations. For example, as one investment gains value, the other tends to lose value. See Modern Portfolio Theory. Net asset value Used by investment companies to measure net assets. It is calculated by subtracting liabilities from the value of a fund's securities and other items of value and dividing this by the number of outstanding shares. Net asset value is popularly used in newspaper mutual fund tables to designate the price per share for the fund. Net worth The unencumbered amount of an individual or corporation's financial resources. Net worth is calculated by subtracting total liabilities from total assets. No-load fund An open- or closed-end fund investment which charges no fees or commissions upon the sale or redemption of its shares. Nonforfeiture option A benefit available from a "cash value" life insurance policy if it is canceled before the insured dies. There are usually three types of nonforfeiture options: (1) cash surrender value, (2) reduced paid-up life insurance, or (3) extended term life insurance. Non-qualified annuity A type of annuity offered outside of a tax-favored employer-sponsored retirement plan to which contributions are made with after-tax dollars. Taxes on earnings and interest are deferred until withdrawal or when annuity payments begin, usually at retirement. NOW account The negotiable order of withdrawal (NOW) is similar to a checking account except that it often requires advance notice of withdrawal. It can be viewed as an interest-earning checking account. O Open-end fund A fund whose shares are redeemable at any time at approximate asset value. In most cases, new shares are offered for sale continuously. Optimal portfolio The efficient portfolio allocation which is best suited to the individual investor's financial situation, risk tolerance, time horizon and investment preferences and, provides the lowest level of historical risk for a specific potential return, or the highest return for a given level of historical risk. See Efficient Portfolio and Asset Allocation. Optimization constraints Constraints, or limitations, on including certain types of investments in a portfolio. Constraining the asset classes to allow for minimums and maximums of certain classes of assets prior to optimization produces "personalized" portfolios to meet a specific risk tolerance, time horizon, and investment preferences. Optional Retirement Program (ORP) A state-sponsored defined-contribution plan designed to help state employees save for retirement, usually within a tax-deferred annuity or fund and often as an alternative or option (hence the name) to a state-sponsored defined-benefit plan. #40030