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Glossary P through R P Passive fund management style Fund manager seeks to emulate the performance of a particular market index. Generally more passive than the active fund management style. Pension fund Fund established by a corporation, labor union or other public or private sector organization to invest employer and, in many cases, employee contributions and administer retirement benefits. Pension plan A form of investment in which regular contributions over a period of time are invested, with the earnings reinvested, and are paid out as an allowance or other series of regular payments after retirement. The term "pension plan" usually refers to a company plan offered by an employer to employees, in which both make periodic contributions. Portfolio Holding of diverse securities and financial assets by an individual or institution. A portfolio could contain, for example, stocks, bonds or stock and bond funds. Portfolio optimization A computer-based process of combining assets of dissimilar behavior to improve the risk/return trade-off of a portfolio. The process seeks to create a portfolio with either the highest potential return at a specific historical risk, or the lowest historical risk for a specific potential return. Positive correlations Investments whose performance emulates each other at various stages of the investment cycle are said to have positive correlations. For example, CD investments at two separate banks will react similarly when interest rates fall. Preferred stock A security that, like common stock, represents ownership in a corporation but has a claim ahead of common stock on the payment of dividends and on the corporation's assets in the event it is dissolved. The dividend paid on preferred stock usually is at a set rate, similar to the coupon rate of bonds, so preferreds are classed as a fixed-income security. Unlike bond interest, however, preferred dividends may be decreased or even omitted at the discretion of the company's directors. Premium (insurance) Amount paid for the purchase of an insurance policy. Price-earnings (P/E) ratio Price of a stock divided by its earnings per share. The P/E ratio may either use the reported earnings from the latest year or employ an analyst's forecast of next year's earnings. The price-earnings ratio, also known as the multiple, gives investors an idea of how much they are paying for a company's earning power. Prime rate Interest rate banks charge to their most creditworthy customers. The rate is determined by the market forces affecting the bank's cost of funds and the rates that borrowers will accept. Principal A capital sum placed in an investment to earn interest or used as some type of fund. Principal risk The risk that an investment will be worth less at the time it is sold than it was worth when it was bought. Probate Judicial process whereby the will of a deceased person is presented to a court and an executor or administrator is appointed to carry out the will's instructions. Profit-sharing Agreement between a corporation and its employees that allows the employees to share in company profits. Annual contributions are made by the company, when it has profits, to a profit-sharing account for each employee, either in cash or in a deferred plan, which may be invested in stocks, bonds, or cash equivalents. The funds in a profit-sharing account generally accumulate tax-deferred until the employee retires or leaves the company. Prospectus The document that offers a new issue of securities to the public. Mutual funds and limited partnerships also issue offering prospectuses. The prospectus provides all the information an investor needs to make an educated decision about the offering. Purchasing power risk The risk that the principal and income from investments will lose their purchasing power because inflation occurs faster than investment growth. Q Qualified retirement plan Plan that meets the qualification requirements set out in detail in Internal Revenue Code sections 401 and 403(a), and as such, are plans established, operated and supported by employers, which have been submitted to and formally approved and "qualified" by the Internal Revenue Service. R Rate of return For a stock, the annual dividend divided by the purchase price; for a bond, the coupon rate divided by the purchase price; for a mutual fund, total return is capital appreciation (increase in the price of an asset) plus income return (dividend paid to the shareholder). Real Estate Investment Trust (REIT) An organization similar to an investment company but concentrating its holdings in property or real estate investments. Real estate investment trusts are required to distribute as much as 90% of their income so the yield is generally very attractive. Rebalancing Adjusting a portfolio, through fund transfers or sales or purchases, to re-establish the initial allocation of assets. Required rate of return The minimum expected return on an asset that an investor requires before investing. Retirement income gap The difference between the funds likely to be available at retirement from Social Security, employer-sponsored retirement plans or personal savings, and the amount of living expenses needed or wanted during retirement. Return The pre-tax profit of an investment, expressed as an annual percentage of the investor's original capital. The sum of the net change in the investment's market value and any dividends or interest paid is divided by the purchase price. Revocable trust A trust in which the grantor reserves to himself the right to revoke. The provisions of such a trust may be altered as many times as the grantor pleases, or the entire trust agreement can be canceled, unlike irrevocable trusts. The grantor may receive income from the assets, but the property passes directly to the beneficiaries at the grantor's death, without having to go through probate court proceedings. Since the grantor retains the right to change or revoke the trust, these assets are considered part of the grantor's estate at time of death and will not escape estate taxes. This kind of trust differs from an irrevocable trust, which permanently transfers assets from the estate during the grantor's lifetime and, therefore, escapes estate tax. Reward See "Return." Rider An addition to a life insurance policy that modifies the policy by adding special provisions. Risk Statistically, the measurable possibility of loss or no gain on an investment; expressed as the standard deviation calculated from historical returns. Risk aversion An unwillingness to expose financial assets to loss conditions. Rollover The nontaxable transfer of assets from one qualified retirement plan to another, such as from a defined contribution plan to an IRA or nontransferable annuity. #40030