Finance Glossary
Clear, plain-English definitions of investment terms and portfolio metrics. Master the vocabulary of modern investing.
Portfolio Risk Metrics Glossary
Deep-dive guides to every risk metric: Sharpe ratio, beta, max drawdown, standard deviation, Sortino ratio, Value at Risk, and more.
Risk Metrics
Terms for measuring and understanding investment risk and volatility
Sharpe Ratio
A measure of risk-adjusted return that compares excess return to volatility. Higher is better.
Sortino Ratio
A variation of Sharpe ratio that only penalizes downside volatility, not upside gains.
Beta
Measures how much a portfolio moves relative to the market. Beta of 1 means it moves with the market.
Alpha
The excess return of a portfolio compared to what would be expected given its beta. Positive alpha means outperformance.
Maximum Drawdown
The largest peak-to-trough decline in portfolio value. Shows worst-case loss scenario.
Value at Risk (VaR)
Estimates the maximum potential loss over a time period at a given confidence level (e.g., 95%).
Downside Deviation (D*)
Measures volatility of returns below a target rate using semivariance. Lower values indicate less downside risk.
Standard Deviation
A measure of how spread out returns are from the average. Higher means more volatile.
Portfolio Theory
Concepts from modern portfolio theory and portfolio construction
Correlation
Measures how two assets move together. Ranges from -1 (opposite) to +1 (identical). Key for diversification.
Tracking Error
The standard deviation of the difference between portfolio returns and benchmark returns.
Capital Asset Pricing Model (CAPM)
A model relating expected return to systematic risk (beta). Foundation for understanding alpha and beta.
Modern Portfolio Theory (MPT)
Framework for constructing portfolios that maximize expected return for a given level of risk through diversification.
Efficient Frontier
The set of portfolios offering the highest expected return for each level of risk. Optimal portfolios lie on this curve.
Diversification
Spreading investments across different assets to reduce risk without sacrificing expected returns.
Performance Metrics
Terms for measuring and comparing investment returns
Total Return
The complete return on an investment including price appreciation and income (dividends, interest).
Annualized Return
The geometric average return per year, allowing comparison of returns over different time periods.
Risk-Adjusted Return
Return measured relative to the risk taken. Allows fair comparison between investments with different risk levels.
Benchmark
A standard (like S&P 500) used to measure portfolio performance. Enables apples-to-apples comparison.
Time-Weighted Return (TWR)
Measures portfolio performance independent of cash flows. Best for comparing manager performance.
Money-Weighted Return (MWR)
Measures actual investor return including the timing and size of cash flows. Shows your personal performance.
All Terms
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