Terminology and Acronyms

I hope you are all well. In this month’s wealth pipeline we will endeavour to explain in layman terms some of the common terminology and acronyms in the world of investments.  As is often the case, each industry has its own jargon which once explained is never as difficult as we first believe.

Beta Returns

A Beta Return is equal to the performance of an index or benchmark.  An example of an index that is commonly referred to in Australia is the ASX200.  In practical terms investment fees should be deducted to calculate beta returns.

Alpha Returns

 An Alpha Return is the ‘active’ or ‘out-performance’ return on an investment.  It is the return in excess of beta returns, and thus commonly used to assess an ‘active’ manager’s performance.  So if an investment returned 14% in a year and its comparable benchmark (index) returned 10%, its alpha return would be 4%

PE Ratio (Price Earnings Ratio)

The Price/Earnings ratio is how much money you are paying for $1 of a company's earnings.  So if a company is reporting a profit of $2 per share and its share price is $20 per share, the P/E is 10.  In other words you are paying ten times earnings.  The earnings component of the PE ratio is quoted on either a historic or forecast basis.

 P/E Ratio = Price Per Share / Annual Earnings per Share

MER (Management Expense Ratio)

This ratio gives the expenses of investment management, marketing, trusteeship, legal, accounting and auditing costs of a managed investment fund (including a superannuation fund) – expressed as a percentage of a fund’s net asset value.

Volatility

Volatility is a measure of the magnitude of the price movement of a security or index over a period of time.  It is generally expressed as a percentage and is annualised.

Volatility disregards the direction of the price movement.  So next time the media report something along the lines that the shares is lower because of market volatility you will now know this is simply not true.  Furthermore, what we generally don’t like is ‘bad’ volatility.  ‘Good’ volatility is generally good.