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An investment strategy that aims to balance risk and reward by apportioning a portfolio's assets
according to an individual's goals, risk tolerance and investment horizon.

The three main asset classes - equities, fixed-income, and cash and equivalents - have different
levels of risk and return, so each will behave differently over time.

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There is no simple formula that can find the right asset allocation for every individual. However,
the consensus among most financial professionals is that asset allocation is one of the most
important decisions that investors make. In other words, your selection of individual securities is
secondary to the way you allocate your investment in stocks, bonds, and cash and equivalents,
which will be the principal determinants of your investment results.

Asset-allocation mutual funds, also known as life-cycle, or target-date, funds, are an attempt to
provide investors with portfolio structures that address an investor's age, risk appetite and
investment objectives with an appropriate apportionment of asset classes. However, critics of this
approach point out that arriving at a standardized solution for allocating portfolio assets is
problematic because individual investors require individual solutions.

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A method of evaluating a security that entails attempting to measure its intrinsic value by
examining related economic, financial and other qualitative and quantitative
factors. Fundamental analysts attempt to study everything that can affect the security's value,
including macroeconomic factors (like the overall economy and industry
conditions) and company-specific factors (like financial condition and management).

The end goal of performing fundamental analysis is to produce a value that an investor can
compare with the security's current price, with the aim of figuring out what sort of position to
take with that security (underpriced = buy, overpriced = sell or short).

This method of security analysis is considered to be the opposite of technical analysis.

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Fundamental analysis is about using real data to evaluate a security's value. Although most
analysts use fundamental analysis to value stocks, this method of valuation can be used for just
about any type of security.

For example, an investor can perform fundamental analysis on a bond's value by looking at
economic factors, such as interest rates and the overall state of the economy, and information
about the bond issuer, such as potential changes in credit ratings. For assessing stocks, this
method uses revenues, earnings, future growth, return on equity, profit margins and other data to
determine a company's underlying value and potential for future growth. In terms of stocks,
fundamental analysis focuses on the financial statements of the company being evaluated.

One of the most famous and successful fundamental analysts is the Oracle of Omaha, Warren
Buffett, who is well known for successfully employing fundamental analysis to pick securities.
His abilities have turned him into a billionaire.

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1. The actual value of a company or an asset based on an underlying perception of its true value
including all aspects of the business, in terms of both tangible and intangible factors. This value
may or may not be the same as the current market value. Value investors use a variety of
analytical techniques in order to estimate the intrinsic value of securities in hopes of finding
investments where the true value of the investment exceeds its current market value.

2. For call options, this is the difference between the underlying stock's price and the strike price.
For put options, it is the difference between the strike price and the underlying stock's price. In
the case of both puts and calls, if the respective difference value is negative, the instrinsic value
is given as zero.

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1. For example, value investors that follow fundamental analysis look at both qualitative
(business model, governance, target market factors etc.) and quantitative (ratios, financial
statement analysis, etc.) aspects of a business to see if the business is currently out of favor with
the market and is really worth much more than its current valuation.

2. Intrinsic value in options is the in-the-money portion of the option's premium. For example, If
a call options strike price is $15 and the underlying stock's market price is at $25, then the
intrinsic value of the call option is $10. An option is usually never worth less than what an option
holder can receive if the option is exercised.


1. The value at which an asset is carried on a balance sheet. To calculate, take the cost of an asset
minus the accumulated depreciation.

2. The net asset value of a company, calculated by total assets minus intangible assets (patents,
goodwill) and liabilities.

3. The initial outlay for an investment. This number may be net or gross of expenses such as
trading costs, sales taxes, service charges and so on.

Also known as "net book value (NBV)".

In the U.K., book value is known as "net asset value".

Book value is the accounting value of a firm. It has two main uses:

1. It is the total value of the company's assets that shareholders would theoretically receive if a
company were liquidated.

2. By being compared to the company's market value, the book value can indicate whether a
stock is under- or overpriced.

3. In personal finance, the book value of an investment is the price paid for a security or debt
investment. When a stock is sold, the selling price less the book value is the capital gain (or loss)
from the investment.

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A form of financing in which large capital expenditures are kept off of a company's balance sheet
through various classification methods. Companies will often use off-balance-sheet financing to
keep their debt to equity (D/E) and leverage ratios low, especially if the inclusion of a large
expenditure would break negative debt covenants.

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Contrast to loans, debt and equity, which do appear on the balance sheet. Examples of off-
balance-sheet financing include joint ventures, research and development partnerships, and
operating leases (rather than purchases of capital equipment).

Operating leases are one of the most common forms of off-balance-sheet financing. In these
cases, the asset itself is kept on the lessor's balance sheet, and the lessee reports only the required
rental expense for use of the asset. Generally Accepted Accounting Principles in the U.S. have
set numerous rules for companies to follow in determining whether a lease should be capitalized
(included on the balance sheet) or expensed.

This term came into popular use during the Enron bankruptcy. Many of the energy traders'
problems stemmed from setting up inappropriate off-balance-sheet entities.


A privilege, sold by one party to another, that gives the buyer the right, but not the obligation, to
buy (call) or sell (put) a stock at an agreed-upon price within a certain period or on a specific

In the U.K., it is known as a "share option".

American options can be exercised anytime between the date of purchase and the expiration date.
European options may only be redeemed at the expiration date. Most exchange-traded stock
options are American.

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The portion of the option premium that is attributable to the amount of time remaining until the
expiration of the option contract.

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Basically, time value is the value the option has in addition to its intrinsic value.