Absolute return on investment
The return generated on a portfolio or portfolios of assets, measured in kronor or per cent, of the original invested amount.

Active management
Asset management actively deviates from the benchmark index in order to create added value.

Active risk/Tracking error
The variation in relative return. Often measured as standard deviation on the relative return. Active risk is calculated using daily data to determine relative return.

Age cohort neutrality
The management of pension capital shall not benefit any single generation or age cohort at the expense of another. All age cohorts must be treated equally.

ALM study
Asset Liability Modelling. An analytical model used to determine the Fund’s strategic portfolio. The study, which is revised on a continual basis, is desig ned to determine the optimal composition for the different classes of asset under Fund management, to ensure that it satisfies the Fund’s long term commitment to the collective requirements of the Swedish national pension system. The judgements based on this analysis shall take into account demo graphic change as well general economic trends.

Benchmark index
Index based on AP2’s strategic portfolio, against which the Fund’s management performance is measured.

Brokerage commission
Brokerage commission is the fee paid to the bank when trading in shares.

Buyout
Acquisition of a majority of the shares in a mature company.

Clearing
All activities that take place after a transaction is completed in a market place and prior to settlement. Includes reporting, risk measurement and netting.

CO₂e
Carbon equivalents (CO₂e) are the amount of greenhouse gases corresponding to the climate impact of carbon. It is a way of translating the contribution of different gases to global warming into a uniform scale. This is because greenhouse gases increase the greenhouse effect by different amounts.

Credit risk/counterparty risk
Credit risk: Credit risk refers to the risk that an issuer may become insolvent or be given a lower credit rating.
Counterparty risk: Refers to the risk that the other party may be unable to meet its business obligations.

CSA agreement
An annex to the ISDA agreement that regulates how the party with an outstanding debt (unrealised loss) must provide collateral for the debt in the form of liquid funds or securities.

Currency exposure
Currency hedging allows an uncertain future exchange rate between two currencies to be locked in through the use of derivatives. It protects against foreign-exchange risks.

Derivative
A collective name for a form of securities. The most common derivatives are options, futures, warrants and swaps. A characteristic of financial derivatives is that they are linked to events or conditions at one specific point in time in the future.

Duration
A measure of interest risk that yields an asset-relative change in value with an interest adjustment of one percentage unit.

Ex-ante
Projected calculations that look ahead in time.

Ex-post
Calculations from realised data that look back in time.

Fair value
Fair value is defined as the amount for which an asset may be transferred or a debt settled, between parties who are mutually independent and who have a vested interest in completing the transaction. Normally speaking, this means that listed assets are valued at the buying-rate (market value) and that the fair value of non-listed assets is estimated with the help of generally accepted valuation models.

FX forward
A derivative instrument involving a contract to purchase foreign currency at some future date at a predetermined rate of exchange.

Idiosyncratic risk
Risk in individual positions that can be diversified if the number of positions are increased.

Illiquid assets
Assets that are not listed on a market with continuous pricing and are the opposite of liquid assets.

Implementation effects
Return contributions that derived from implementation of the strategic portfolio and index switches.

Information ratio
A gauge of risk-adjusted relative return. Measured as relative return, divided by tracking error.

Interest rate swap
A contract between two counterparties, in which one interest flow is exchan ged for another. Normally, the undertaking given by one party to pay a fixed rate of interest is exchanged for the other party’s undertaking to pay a floating rate of interest.

IPEV
International Private Equity and Venture Capital Valuation Guidelines.

ISDA contract
International Swaps and Derivatives Association. An ISDA contract is a standard contract for the regulation of trading in derivatives between two counterparties.

Liquidity risk
Refers to the risk that securities cannot be converted into cash, because of redu ced access to or demand from the market, which either precludes the purchase or sale of such securities, or would require their sale at a lower price.

Market risk
The market risks most relevant to AP2 are share-price risk, interest-rate risk and currency risk.

MSCI index
International equity indices managed by Morgan Stanley Capital International.

Operational risk
Refers to the risk that an error or stoppage in operations could lead to economic loss or reduced credibility.

Option
Entitles the holder to buy or sell an underlying asset at a predefined price and moment in time. The option issuer has equivalent obligations. Options may include currency options, interest rate options and
share options.

Private equity
Collective term for equities that are not listed on an official or public market.

Quantitative management
Asset management that focuses on exposing incorrect market pricing with the help of a mathematical model.

Real return
Nominal return adjusted for inflation.

Relative return
Portfolio return compared to return on Fund’s strategic portfolio. The return is cleared of commission and operating expenses.

Risk-adjusted return
A means of evaluating management performance in which return is considered in relation to the level
of risk in the portfolio. The Sharpe and information ratios are two examples.

S&P/Standard & Poor’s
Standard & Poor’s composite index. A cap-weighted share index with over 500 US companies. Selection is based on size, liquidity and industrial sector, among other factors.

Sharpe ratio
A gauge of risk-adjusted return. Measured as the portfolio’s absolute return less risk-free interest (SSVX 12 months), divided by the standard deviation on absolute return.

Strategic portfolio
AP2’s strategic portfolio is determined annually by the Board of Directors and confirms the Fund’s decision on strategic asset allocation.

Systematic risk
Market risk segment that cannot be diversified by increasing the number of positions.

TAA
Tactical Asset Allocation. An active investment strategy that centres on taking advantage of differences in expected performance of various asset classes.

TCFD
The Task Force on Climate-related Financial Disclosure (TCFD) is a framework to help organisations identify and prevent their climate-related financial risks.

TNFD
The Taskforce on Nature-related Financial Disclosures (TNFD) is based on the TCFD framework, which focuses on the disclosure of climate-related financial risks and opportunities.

Tracking error
Measures the variation in active return. Is measured as the standard deviation of active return. Historical (ex post) tracking error describes the variation in realised active return and thus measures risk levels retroactively. Expected (ex ante) tracking error is a forecast.

Value-at-Risk, VaR
A measure of risk that indicates the maximum loss, based on a given confidence level, that a portfolio may incur over a given period. VaR is normally calculated at a confidence level of 95 per cent.

Volatility
Volatility refers to the amount the price of a financial asset varies over time. This is normally expressed as a percentage, in terms of the standard deviation.