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Portfolio & Risk terms
Allocation, factor exposure, value at risk and the systems that run portfolios.
Alpha The portion of an investment's return not explained by its exposure to a benchmark or risk factors. Asset allocation The decision of how to split an investment portfolio across asset classes such as stocks, bonds, and cash. Backtesting Testing a trading or investment strategy against historical data to see how it would have performed. Benchmark index A market index used as the reference point for judging whether a portfolio or fund's performance and risk are competitive. Beta A measure of how much an asset's returns move relative to a benchmark, most often the broad market. Climate value-at-risk (climate VaR) An estimate of how much climate change and the transition to low carbon could reduce the value of a portfolio. Expected shortfall (ES) The average loss in the worst-case scenarios that exceed a value-at-risk threshold. Factor investing Building portfolios around specific, historically rewarded drivers of return, such as value or momentum. Fundamental analysis Valuing a security from the underlying business's financial health and economic conditions, not its price history. Internal rate of return (IRR) The discount rate at which an investment's projected cash flows have a net present value of zero. Maximum drawdown (MDD) The largest peak-to-trough decline in an investment's value before it reaches a new high. Money-weighted return (MWR) A return measure that accounts for the size and timing of an investor's own deposits and withdrawals, like an internal rate of return. Portfolio rebalancing Buying and selling holdings to bring a portfolio's asset weights back to its target allocation after they drift. Risk profiling Assessing an investor's ability and willingness to tolerate investment losses, used to guide asset allocation decisions. Sharpe ratio A measure of risk-adjusted return: excess return earned per unit of total volatility taken on. Sortino ratio A risk-adjusted return measure like the Sharpe ratio, but penalizing only downside volatility. Time-weighted return (TWR) A return measure that removes the effect of cash flows into or out of a portfolio, isolating the manager's investment performance. Tracking error The standard deviation of the difference between a portfolio's returns and its benchmark's returns. Value at risk (VaR) An estimate of the maximum loss a portfolio is expected to face over a given period at a set confidence level. Volatility The degree to which an asset's returns fluctuate over time, the standard proxy for investment risk.