Definition of strategy

strategy

the link between an organization’s goals and objectives
and the activities actually conducted by the organization

Active portfolio strategy

A strategy that uses available information and forecasting techniques to seek a
better performance than a portfolio that is simply diversified broadly. Related: passive portfolio strategy

Barbell strategy

A strategy in which the maturities of the securities included in the portfolio are concentrated
at two extremes.

Bullet strategy

A strategy in which a portfolio is constructed so that the maturities of its securities are highly
concentrated at one point on the yield curve.

Buy-and-hold strategy

A passive investment strategy with no active buying and selling of stocks from the
time the portfolio is created until the end of the investment horizon.

Combination strategy

A strategy in which a put and with the same strike price and expiration are either both
bought or both sold. Related: Straddle

Covered call writing strategy

A strategy that involves writing a call option on securities that the investor
owns in his or her portfolio. See covered or hedge option strategies.

Dedication strategy

Refers to multi-period cash flow matching.

Immunization strategy

A bond portfolio strategy whose goal is to eliminate the portfolio's risk against a
general change in the rate of interest through the use of duration.

Import-substitution development strategy

A development strategy followed by many Latin American
countries and other LDCs that emphasized import substitution - accomplished through protectionism - as the
route to economic growth.

Ladder strategy

A bond portfolio strategy in which the portfolio is constructed to have approximately equal
amounts invested in every maturity within a given range.

Overlay strategy

A strategy of using futures for asset allocation by pension sponsors to avoid disrupting the
activities of money managers.

Passive portfolio strategy

A strategy that involves minimal expectational input, and instead relies on
diversification to match the performance of some market index. A passive strategy assumes that the
marketplace will reflect all available information in the price paid for securities, and therefore, does not
attempt to find mispriced securities. Related: active portfolio strategy

Passive investment strategy

See: passive management.

Protective put buying strategy

A strategy that involves buying a put option on the underlying security that is
held in a portfolio. Related: Hedge option strategies

Randomized strategy

A strategy of introducing into the decision-making process a random element that is
designed to reduce the information content of the decision-maker's observed choices.

Spread strategy

A strategy that involves a position in one or more options so that the cost of buying an
option is funded entirely or in part by selling another option in the same underlying. Also called spreading.

Stock replacement strategy

A strategy for enhancing a portfolio's return, employed when the futures
contract is expensive based on its theoretical price, involving a swap between the futures, treasury bills
portfolio and a stock portfolio.

Structured portfolio strategy

A strategy in which a portfolio is designed to achieve the performance of some
predetermined liabilities that must be paid out in the future.

compensation strategy

a foundation for the compensation plan that addresses the role compensation should play in the organization

confrontation strategy

an organizational strategy in which company management decides to confront, rather than avoid, competition; an organizational strategy in which company management still attempts to differentiate company
products through new features or to develop a price
leadership position by dropping prices, even though management
recognizes that competitors will rapidly bring out
similar products and match price changes; an organizational
strategy in which company management identifies
and exploits current opportunities for competitive advantage
in recognition of the fact that those opportunities will
soon be eliminated

cost leadership strategy

a plan to achieve the position in a
competitive environment of being the low cost producer of
a product or provider of a service; it provides one method
of avoiding competition

differentiation strategy

a technique for avoiding competition by distinguishing a product or service from that of competitors through adding sufficient value (including quality and/or features) that customers are willing to pay
a higher price than that charged by competitors

Benchmark

The performance of a predetermined set of securities, for comparison purposes. Such sets may be
based on published indexes or may be customized to suit an investment strategy.

Bull spread

A spread strategy in which an investor buys an out-of-the-money put option, financing it by
selling an out-of-the money call option on the same underlying.

Contingent immunization

An arrangement in which the money manager pursues an active bond portfolio
strategy until an adverse investment experience drives the then-available potential return down to the safetynet
level. When that point is reached, the money manager is obligated to pursue an immunization strategy to
lock in the safety-net level return.

Decile rank

Performance over time, rated on a scale of 1-10.1 indicates that a mutual fund's return was in the
top 10% of funds being compared, while 3 means the return was in the top 30%. Objective Rank compares all
funds in the same investment strategy category. All Rank compares all funds.

Delta hedge

A dynamic hedging strategy using options with continuous adjustment of the number of options
used, as a function of the delta of the option.

Dollar safety margin

The dollar equivalent of the safety cushion for a portfolio in a contingent immunization
strategy.

Dynamic asset allocation

An asset allocation strategy in which the asset mix is mechanistically shifted in
response to -changing market conditions, as in a portfolio insurance strategy, for example.

Dynamic hedging

A strategy that involves rebalancing hedge positions as market conditions change; a
strategy that seeks to insure the value of a portfolio using a synthetic put option.

Enhanced indexing

Also called indexing plus, an indexing strategy whose objective is to exceed or replicate
the total return performance of some predetermined index.

Exact matching

A bond portfolio management strategy that involves finding the lowest cost portfolio
generating cash inflows exactly equal to cash outflows that are being financed by investment.

Hedging

A strategy designed to reduce investment risk using call options, put options, short selling, or futures
contracts. A hedge can help lock in existing profits. Its purpose is to reduce the volatility of a portfolio, by
reducing the risk of loss.

Index arbitrage

An investment/trading strategy that exploits divergences between actual and theoretical
futures prices.

Indexing

A passive instrument strategy consisting of the construction of a portfolio of stocks designed to
track the total return performance of an index of stocks.

Informationless trades

Trades that are the result of either a reallocation of wealth or an implementation of an
investment strategy that only utilizes existing information.

Marketplace price efficiency

The degree to which the prices of assets reflect the available marketplace
information. Marketplace price efficiency is sometimes estimated as the difficulty faced by active
management of earning a greater return than passive management would, after adjusting for the risk
associated with a strategy and the transactions costs associated with implementing a strategy.

Markowitz diversification

A strategy that seeks to combine assets a portfolio with returns that are less than
perfectly positively correlated, in an effort to lower portfolio risk (variance) without sacrificing return.
Related: naive diversification

Multiperiod immunization

A portfolio strategy in which a portfolio is created that will be capable of
satisfying more than one predetermined future liability regardless if interest rates change.

Multirule system

A technical trading strategy that combines mechanical rules, such as the CRISMA
(cumulative volume, relative strength, moving average) Trading System of Pruitt and White.

Naive diversification

A strategy whereby an investor simply invests in a number of different assets and
hopes that the variance of the expected return on the portfolio is lowered.
Related: Markowitz diversification.

Naked option strategies

An unhedged strategy making exclusive use of one of the following: Long call
strategy (buying call options ), short call strategy (selling or writing call options), Long put strategy (buying
put options ), and short put strategy (selling or writing put options). By themselves, these positions are called
naked strategies because they do not involve an offsetting or risk-reducing position in another option or the
underlying security.
Related: covered option strategies.

Objective (mutual fund)

The fund's investment strategy category as stated in the prospectus. There are
more than 20 standardized categories.

Pac-Man

strategy Takeover defense strategy in which the prospective acquiree retaliates against the
acquirer's tender offer by launching its own tender offer for the other firm.

Portfolio insurance

A strategy using a leveraged portfolio in the underlying stock to create a synthetic put
option. The strategy's goal is to ensure that the value of the portfolio does not fall below a certain level.

Safety cushion

In a contingent immunization strategy, the difference between the initially available
immunization level and the safety-net return.

Safety-net return

The minimum available return that will trigger an immunization strategy in a contingent
immunization strategy.

Tactical Asset Allocation (TAA)

An asset allocation strategy that allows active departures from the normal
asset mix based upon rigorous objective measures of value. Often called active management. It involves
forecasting asset returns, volatilities and correlations. The forecasted variables may be functions of
fundamental variables, economic variables or even technical variables.

Tilted portfolio

An indexing strategy that is linked to active management through the emphasis of a
particular industry sector, selected performance factors such as earnings momentum, dividend yield, priceearnings
ratio, or selected economic factors such as interest rates and inflation.

Tracking error

In an indexing strategy, the difference between the performance of the benchmark and the
replicating portfolio.

Zero-investment portfolio

A portfolio of zero net value established by buying and shorting component
securities, usually in the context of an arbitrage strategy.

Strategic management accounting

The provision and analysis of management accounting data about a business and its competitors, which is of use in the development and monitoring of strategy (Simmonds).

financial leverage

The equity (ownership) capital of a business can serve
as the basis for securing debt capital (borrowing money). In this way, a
business increases the total capital available to invest in its assets and
can make more sales and more profit. The strategy is to earn operating
profit, or earnings before interest and income tax (EBIT), on the capital
supplied from debt that is more than the interest paid on the debt capital.
A financial leverage gain equals the EBIT earned on debt capital
minus the interest on the debt. A financial leverage gain augments earnings
on equity capital. A business must earn a rate of return on its assets
(ROA) that is greater than the interest rate on its debt to make a financial
leverage gain. If the spread between its ROA and interest rate is unfavorable,
a business suffers a financial leverage loss.

environmental constraint

any limitation on strategy options
caused by external cultural, fiscal, legal/regulatory,
or political situations; a limiting factor that is not under the
direct control of an organization’s management; tend to be
fairly long-run in nature

planning

the process of creating the goals and objectives for
an organization and developing a strategy for achieving
them in a systematic manner

Straddle

A strategy used in trading options or futures. It involves
simultaneously purchasing put and call options with the same exercise price
and expiration date, and it is most profitable when the price of the underlying
security is very volatile.

chief financial officer (CFO)

Officer who oversees the treasurer and controller and sets overall financial strategy.

diversification

strategy designed to reduce risk by spreading the portfolio across many investments.

Income Splitting

This is a tax planning strategy of arranging for income to be transferred to family members who are in lower tax brackets than the one earning the income, thus reducing taxes. Even though attribution rules limit income splitting, there are still a number of legitimate ways to do so, such as through the use of spousal RRSPs.

Insured Retirement Plan

This is a recently coined phrase describing the concept of using Universal Life Insurance to tax shelter earnings which can be used to generate tax-free income in retirement. The concept has been described by some as "the most effective tax-neutralization strategy that exists in Canada today."
In addition to life insurance, a Universal Life Policy includes a tax-sheltered cash value fund that cannot exceed the policy's face value. Deposits made into the policy are partially used to fund the life insurance and partially grow tax sheltered inside the policy. It should be pointed out that in order for this to work, you must make deposits into this kind of policy well in excess of the cost of the underlying insurance. Investment of the cash value inside the policy are commonly mutual fund type investments. Upon retirement, the policy owner can draw on the accumulated capital in his/her policy by using the policy as collateral for a series of demand loans at the bank. The loans are structured so the sum of money borrowed plus interest never exceeds 75% of the accumulated investment account. The loans are only repaid with the tax free death benefit at the death of the policy holder. Any remaining funds are paid out tax free to named beneficiaries.
Recognizing the value to policy holders of this use of Universal Life Insurance, insurance companies are reworking features of their products to allow the policy holder to ask to have the relationship of insurance to investment growth tracked so that investment growth inside the policy may be maximized. The only potential downside of this strategy is the possibility of the government changing the tax rules to prohibit using a life insurance product in this manner.

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