Glossary

Terms that come up in everyday portfolio analysis, in two sentences each. Terms with their own page are linked.

Risk & loss

Volatility: How widely a portfolio swings, in percent per year, measured as the annualised standard deviation of daily returns. Says nothing about direction. Read more
Maximum drawdown: The deepest fall from a peak to the trough that follows it within a period. Read more
Drawdown recovery: The date on which a portfolio regained its former peak after the deepest decline. "Not yet recovered" means the loss still stands today.
Value at risk (VaR): The loss threshold not exceeded on 95 out of 100 trading days (VaR 95 %). VaR 99 % describes the rarer, harder days and therefore sits higher. Read more
Conditional value at risk (CVaR): The average loss on exactly those days that VaR excludes. Always above VaR, and a more honest picture of what bad days cost.
Parametric VaR: VaR derived from a normal distribution instead of read off actual trading days. A wide gap to the historical VaR means the real history held more extreme days than theory expects.
Skewness: Whether surprises tend to be good or bad. Negative means rare but violent losing days, typical for equities. Positive means the outliers are large winning days.
Kurtosis: How often things get truly extreme. A high value means violent crash or rally days occur more often than a bell curve would suggest.
Resilience score: A 0 to 100 score derived from simulated crisis scenarios. High means smaller losses and faster recovery. Above 70 counts as resilient, below 40 as fragile. Read more

Risk-adjusted metrics

Sharpe ratio: Return above the risk-free rate per unit of total volatility. Above 1 is considered good. Read more
Sortino ratio: Like the Sharpe ratio, but counting only downside volatility in the denominator. Read more
Calmar ratio: Return p.a. divided by maximum drawdown: how much annual return per percentage point of the worst decline. Above 1 means annual return exceeded the deepest fall.

Measuring return properly

Annualised return (CAGR): Total return converted geometrically into an average year. Only this makes periods of different length fairly comparable. Read more
Time-weighted return (TWR): Measures investment quality independent of when money was paid in. Its counterpart is the money-weighted return, which also grades the timing of cash flows. Read more

Benchmark & factors

Information ratio: Excess return over the benchmark relative to tracking error. Answers whether deviating from the index paid off. Above 0.5 is considered good.
Tracking error: How closely a portfolio tracks its benchmark. Below roughly 2 % it moves almost like the index, above roughly 6 % it goes its own way. Neither good nor bad.
R-squared: The share of a portfolio path explained by the benchmark, from 0 to 1. When R² is low, beta and alpha should be read with caution.
Correlation: How closely two series move together, from −1 to +1. It says nothing about the size of the swings, only how often both rise or fall together. Read more
Up capture: The share of benchmark gains a portfolio captures in rising phases. 100 % means fully along, 70 % means part is left on the table.
Down capture: The share of benchmark losses a portfolio takes on in falling phases. 80 % means a fifth was cushioned. Here, lower is better.
Hit rate: The share of trading days closing in the black. Above 50 % is pleasing but says nothing about magnitude: a few large losing days eat many small winning ones.
Factor premium: What a factor contributed on average per year over the period, already scaled to the portfolio in question.
Residual volatility: The unexplained remainder of volatility that neither the market nor known factors account for. High means a lot of portfolio-specific movement or noise.
Multicollinearity (VIF): A measure of how far factors overlap each other. From a VIF of 5 upwards, individual factor betas can no longer be cleanly separated.
Degrees of freedom: Common months minus the number of factors. Few degrees of freedom mean a thin data basis, where results can look good or bad largely by chance.
Beta: How strongly a portfolio follows the moves of its benchmark. 1.0 means lockstep, below 1 more defensive, above 1 harder in both directions. Read more
Alpha: The part of return that market movement does not explain. Indistinguishable from chance without a t-statistic; for most portfolios alpha sits near zero. Read more
Factor investing: Recurring patterns such as size, value or momentum that explain return differences between stocks. A regression decomposes a portfolio into these building blocks. Read more

Models & simulation

Constant mix: A strategy holding target weights constant through regular rebalancing. The basis of backtest simulations, not of real trading history. Read more
Monte Carlo simulation: Plays through thousands of possible price paths and yields a range instead of a single number. The median is the middle outcome, not a forecast. Read more

This text is general information. It is neither investment advice nor a recommendation. Metrics describe past periods and allow no conclusion about future performance.