Glossary

Learn financial and statistical terms to understand the investment language.

Beta
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

CAGR
Compound Annual Growth Rate is a number that describes the rate at which an investment would have grown if it grew at a steady rate.

Correlation
A statistical measure of how two data sets move in relation to each other. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction.

Drawdown
The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted as the percentage between the peak and the trough.

ETF
An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. ETFs are attractive as investments because of their low costs, tax efficiency, and stock-like features.

Kurtosis
A statistical measure used to describe the distribution of observed data around the mean.

Sharpe Ratio
A ratio developed to measure risk-adjusted performance. The Sharpe ratio tells us whether a portfolio’s returns are due to smart investment decisions or a result of excess risk. The greater a portfolio’s Sharpe ratio, the better its risk-adjusted performance has been.

Short Selling
Short selling (also known as shorting or going short) is the practice of selling securities, that have been borrowed from a third party (usually a broker). The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as the seller will pay less to buy the assets than it received on selling them. The short seller will incur a loss if the price of the assets rises.

Skewness
Describe asymmetry from the normal distribution in a set of statistical data. Skewness can come in the form of “negative skewness” or “positive skewness”, depending on whether data points are skewed to the left (negative skew) or to the right (positive skew) of the data average.

Technical Analysis
A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. Technical analysts believe that the historical performance of stocks and markets are indications of future performance.

Total Return
An investment performance measure that combines two components; any change in the price of the security and any dividends or interest paid to shareholders over the period being measured.

Upside/Downside Capture Ratio
A statistical measure of an investment manager’s overall performance in up and down-markets. The up/down-market capture ratio is used to evaluate how well an investment manager performed relative to an index during periods when that index has risen/fallen. An investment manager who has an up-market ratio greater than 100 has outperformed the index during the up-market. For example, a manager with an up-market capture ratio of 120 indicates that the manager outperformed the market by 20% during the specified period. An investment manager who has a down-market ratio less than 100 has outperformed the index during the down-market. An investment manager who has positive performance when the index is negative will have down-market ratio less than 0.

Value at Risk (VaR)
A technique used to estimate the probability of portfolio losses based on the statistical analysis of historical price trends and volatilities. For example, if a portfolio of stocks has a one-day 5% VaR of $1 million, there is a 0.05 probability that the portfolio will fall in value by more than $1 million over a one-day period if there is no trading.

Source: Wikipedia, Investopedia