Portfolio Management

Glossary

401(k) plan

A qualified plan established by employers into which employees may make salary contributions on an after-tax or pretax basis and directly allocate among investment offerings. Named for the section of IRS tax code that allows tax deferral.

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Abnormal returns

Returns in excess of those predicted by exposure to systematic risk factors.

Accrual basis

The most commonly used accounting method. Accrual basis accounting reports income when earned and expenses when incurred. Cash basis accounting reports income when received and expenses when paid.

Accumulated benefit obligation (ABO)

The present value of a pension plan's liabilities reflecting only currently vested benefits.

Active management

The attempt to earn excess returns through forecasting broad market trends or identifying mispriced securities.

Agency bonds

Fixed-income securities issued by agencies and organizations of the U.S. government.

Agency cost

The cost of conflicts of interest between investors and fund managers or between stockholders, bondholders, and managers.

Allocation effects

The return attributed to active allocation decisions; that is, the return from having portfolio weights different from the benchmark.

Alpha

Return generated over and above the compensation for taking risk; the return in excess of that predicted by an equilibrium model.

Alternative assets

Assets beyond the traditional categories of stocks, bonds, and cash.

American depository receipts (ADRS)

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