Reference

Investing Glossary

Plain-English definitions of the metrics, ratios and concepts used across Fortfolio. Each entry is descriptive — educational only, not investment advice.

— A —

Alpha

Return in excess of what beta exposure to the benchmark would predict.

Alpha is the intercept of the same regression that produces beta — the portion of returns not explained by the benchmark. Positive alpha indicates the strategy outperformed what its market exposure alone would have produced; negative alpha indicates it underperformed. Statistical alpha can shrink or vanish when more factors are added to the model.

Altman Z-Score

A weighted formula estimating the bankruptcy risk of a firm.

The Altman Z-Score combines five accounting ratios — working capital to assets, retained earnings to assets, EBIT to assets, market equity to liabilities, and sales to assets — into a single number. Conventional bands describe a "safe zone" above 2.99, a "grey zone" between 1.81 and 2.99, and a "distress zone" below 1.81. It is descriptive of historical balance-sheet stress and is not a guarantee of future solvency.

Related:Piotroski F-Score

— B —

Beta

Sensitivity of an asset's returns to movements in a benchmark.

Beta is the slope from a regression of the asset's returns against a benchmark such as the S&P 500. A beta of 1.0 means the asset historically moved one-for-one with the benchmark; 1.5 means it amplified moves; below 1.0 means it dampened them. Beta is a backward-looking estimate and can change over time, especially around regime shifts.

Bollinger Bands

A moving average plus and minus a multiple of its rolling standard deviation.

Bollinger Bands wrap a moving average (typically a 20-period SMA) with upper and lower bands placed a chosen number of standard deviations away (commonly two). The bands widen during volatile periods and contract during quiet ones. Touches of the bands are not automatic signals — they describe statistical extremity relative to recent volatility, nothing more.

Bootstrap Resampling

Drawing return paths by sampling from observed historical returns.

Bootstrap resampling builds simulated paths by drawing returns (with replacement) directly from the historical record, instead of assuming a parametric distribution. Block-bootstrap variants preserve some of the autocorrelation in returns. The technique is honest about what it knows — the past — but cannot generate outcomes more extreme than the observed sample unless explicit tail extensions are added.

— C —

CAGR (Compound Annual Growth Rate)

The constant yearly rate that would grow a starting value to its end value.

CAGR is the smoothed annualised return that, if compounded each year, would take a starting investment to its observed ending value. It strips out year-to-year volatility and is a common way to compare investments over different time horizons. Because it is a geometric average, CAGR is always less than or equal to the simple arithmetic average of annual returns when those returns vary.

Calmar Ratio

Annualised return divided by the absolute value of max drawdown.

Calmar compares compounded return to the worst peak-to-trough loss observed over the same window. It answers a practical question: how much annualised return did the strategy deliver per unit of worst-case pain? A Calmar of 1.0 means the strategy earned, per year on average, what it lost at its deepest drawdown.

Correlation

A unitless measure between -1 and +1 of how two return series move together.

Correlation expresses the linear co-movement of two return series. +1 means they move in lockstep, 0 means no linear relationship, and -1 means they move in exactly opposite directions. Diversification benefits grow as correlations among portfolio components fall below 1, but correlations are unstable and tend to rise during severe market stress.

Related:Beta, Effective N, Factor Model

CVaR (Conditional Value at Risk)

The average loss in the worst tail of the return distribution.

CVaR — also called Expected Shortfall — is the average return in the worst X% of cases (commonly the worst 5% or 1%). Unlike Value at Risk, which only marks the threshold, CVaR measures how bad the losses are once that threshold is breached. It is a coherent risk measure and is often preferred for assessing portfolios with fat tails or option-like payoffs.

— D —

DCA (Dollar-Cost Averaging)

Investing a fixed cash amount on a regular schedule regardless of price.

Dollar-cost averaging splits a planned investment into equal periodic contributions. The effect is to buy more shares when prices are low and fewer when prices are high, producing an average cost that depends on the path of prices over the contribution window. DCA is a behavioural and cash-flow tool; it does not by itself improve expected return relative to lump-sum investing.

DCF (Discounted Cash Flow)

Valuing an asset as the present value of its expected future cash flows.

A DCF model projects future free cash flows over an explicit forecast period, adds a terminal value to capture cash flows beyond that horizon, and discounts the entire stream back to today using a required rate of return (usually the WACC). The output is highly sensitive to the discount rate and the terminal-growth assumption — small input changes can swing the result substantially.

Dividend Yield

Annual dividends per share divided by the current share price.

Dividend yield expresses the cash dividend paid over the past year (or the indicated forward dividend) as a percentage of the share price. It is a component of total return alongside capital appreciation. Unusually high yields can reflect strong cash generation or, equivalently, a depressed share price anticipating a dividend cut — context matters.

Related:Payout Ratio, Total Return

— E —

Effective N

How many truly independent bets a multi-asset portfolio behaves like.

Effective N is a diversification diagnostic. A portfolio of ten highly correlated assets behaves more like one or two independent bets than ten. Several formulas exist (most commonly based on the eigenvalues of the correlation matrix or the inverse of weighted correlations); they all collapse to a single number that is at most the count of holdings and falls as correlations rise.

Related:Correlation, Factor Model

EMA (Exponential Moving Average)

A weighted moving average that gives more weight to recent prices.

An EMA applies exponentially decaying weights to past prices, so newer observations matter more than older ones. It reacts faster to price changes than an SMA of the same length, at the cost of more whipsaw. EMAs are the basis of MACD and many trend-following overlays.

EV/EBITDA

Enterprise value divided by earnings before interest, taxes, depreciation and amortisation.

EV/EBITDA compares the total value of a firm (equity plus debt minus cash) to a near-cash earnings measure. Because it ignores capital-structure and non-cash charges, it allows cross-comparison between firms with different leverage or depreciation policies. It is widely used in leveraged-buyout and M&A contexts; it is not appropriate for financial firms whose earnings are interest-driven.

— F —

Factor Model

A regression model that explains returns by exposure to common drivers.

Factor models decompose returns into exposures to a small number of common factors plus an idiosyncratic residual. The Fama-French three-factor model adds size and value to the market; later extensions add momentum, quality and profitability. Factor exposures are descriptive and can be unstable across regimes — a portfolio's factor profile today is not a forecast of its factor profile tomorrow.

Related:Alpha, Beta, Correlation

— G —

Graham Number

A simple intrinsic-value yardstick derived from EPS and book value per share.

The Graham Number, attributed to Benjamin Graham, is the square root of 22.5 times earnings per share times book value per share. The 22.5 constant is the product of a maximum acceptable P/E of 15 and a maximum acceptable P/B of 1.5. It is a coarse rule-of-thumb for defensive-style stocks and ignores growth, intangibles and capital structure.

— I —

Inflation-Adjusted (Real) Return

Nominal return minus inflation — the true gain in purchasing power.

Inflation-adjusted, or real, return restates nominal returns in constant purchasing-power terms by removing the effect of consumer-price inflation. The standard formula is (1 + nominal) / (1 + inflation) − 1, not a simple subtraction. Long-horizon retirement and savings analyses generally use real returns, because nominal numbers can flatter results over decades.

— M —

MACD (Moving Average Convergence Divergence)

The difference between two exponential moving averages, plus a signal line.

MACD is the difference between a fast and a slow exponential moving average (commonly the 12-period and 26-period EMAs). A nine-period EMA of the MACD itself is plotted as the signal line. Practitioners interpret crossovers, divergences from price, and the slope of the MACD histogram as trend and momentum cues.

Market Regime

A persistent period during which asset returns share common statistical properties.

A regime is a stretch of market behaviour with relatively stable mean, volatility and correlation characteristics — for example, a low-volatility bull regime or a high-volatility crisis regime. Regime-switching models attempt to identify these states from the data using techniques such as hidden Markov models. Regime labels are descriptive; transitions between regimes are difficult to forecast in real time.

Related:Volatility, Correlation

Max Drawdown

The largest peak-to-trough percentage loss observed over a period.

Max drawdown measures the worst peak-to-trough decline of an investment over a given window, before a new peak is reached. It is expressed as a negative percentage and is widely used as a downside-risk yardstick because it captures actual realised losses rather than statistical dispersion. Two portfolios with identical average returns can have very different max drawdowns depending on how concentrated their losses were in time.

Monte Carlo Simulation

Drawing many random return paths to estimate a distribution of outcomes.

Monte Carlo simulation generates thousands of possible future return paths by drawing from an assumed return distribution (parametric or historical). The output is a distribution of outcomes — for example, ending portfolio values or success rates of a withdrawal plan. The quality of the answer depends entirely on the quality of the input distribution; Monte Carlo does not predict the future, it explores the variability implied by its inputs.

— P —

Payout Ratio

The share of earnings paid out as dividends.

The payout ratio is dividends per share divided by earnings per share, or equivalently the share of net income returned to shareholders as cash. Sustained payout ratios above 100% mean the dividend is being funded from sources other than current earnings (cash reserves, debt, asset sales) and may not be sustainable indefinitely.

Related:Dividend Yield

Piotroski F-Score

A 0-9 fundamental-quality score from nine accounting checks.

The Piotroski F-Score, introduced by Joseph Piotroski in 2000, awards one point for each of nine binary criteria covering profitability, leverage/liquidity, and operating efficiency. The maximum score is 9. It is a screening heuristic for the relative fundamental strength of a firm, originally applied to high book-to-market stocks, and is descriptive rather than predictive.

Related:Altman Z-Score, Graham Number

— R —

RSI (Relative Strength Index)

A 0-100 momentum oscillator comparing recent gains to recent losses.

RSI, introduced by J. Welles Wilder, compares the average size of recent up-moves to the average size of recent down-moves over a lookback (typically 14 periods) and rescales the result to a 0-100 range. Conventional thresholds label readings above 70 as overbought and below 30 as oversold, though these signals are widely debated and can persist for long stretches in trending markets.

— S —

Safe Withdrawal Rate (SWR)

The yearly withdrawal percentage a retirement portfolio is estimated to sustain.

The safe withdrawal rate is the inflation-adjusted percentage of an initial portfolio that can be withdrawn each year for a target horizon without exhausting the portfolio in a defined fraction of historical or simulated paths. The well-known "4% rule" comes from work by Bengen and the Trinity study using US data and a 30-year horizon; results vary considerably with horizon, asset mix, fees, taxes and the dataset used.

Sharpe Ratio

Excess return per unit of total volatility.

The Sharpe ratio divides the portfolio's excess return over the risk-free rate by the standard deviation of those excess returns. It rewards strategies that deliver more return per unit of total risk and penalises those whose returns are erratic. Sharpe treats upside and downside volatility identically, which is why some practitioners prefer the Sortino ratio when only downside risk matters.

SIP (Systematic Investment Plan)

The South-Asian term for a scheduled, recurring contribution into a fund or stock.

A Systematic Investment Plan is a structured form of dollar-cost averaging, common in India and other South-Asian markets, where a fixed amount is automatically debited and invested on a recurring date. Mechanically it is equivalent to DCA; the term is used widely in retail mutual-fund products.

Related:DCA (Dollar-Cost Averaging)

SMA (Simple Moving Average)

The arithmetic mean of prices over a fixed lookback window.

A simple moving average sums the last N prices and divides by N, recomputed each period. It smooths short-term noise and is the building block for many trend filters. Because every observation in the window has equal weight, SMAs respond more slowly to recent moves than exponential moving averages.

Sortino Ratio

Excess return per unit of downside volatility only.

The Sortino ratio is a variant of Sharpe that uses only downside deviation — the standard deviation of returns that fell below a target (often zero or the risk-free rate). The intuition is that investors do not mind upside surprises, so penalising them in a risk measure is misleading. A higher Sortino indicates more reward per unit of harmful volatility.

— T —

Tax-Loss Harvesting

Realising investment losses to offset capital gains for tax purposes.

Tax-loss harvesting is the practice of deliberately selling positions that are below their cost basis to realise a loss that can offset realised gains (and, in some jurisdictions, a limited amount of ordinary income). Proceeds are typically reinvested into a similar but not "substantially identical" position to maintain market exposure. Rules vary significantly by jurisdiction and are subject to wash-sale restrictions.

Terminal Growth Rate

The perpetual growth rate assumed for cash flows beyond a DCF forecast horizon.

In a DCF, the terminal value captures all cash flows beyond the explicit forecast period. The most common formulation (the Gordon growth model) assumes those cash flows grow at a constant rate forever. The terminal-growth rate must be lower than the discount rate and is usually capped near long-run nominal GDP growth — assumptions above that level imply the firm eventually exceeds the size of the economy.

Total Return

Return including both price change and reinvested dividends or distributions.

Total return assumes that any cash distributions paid during the holding period are reinvested into the same security at the time they are received. It is the most apples-to-apples measure for comparing dividend-paying and non-paying assets. Most academic and benchmark series quoted by Fortfolio (e.g. SPY adjusted close) are total-return series.

— V —

Volatility

The standard deviation of returns, usually annualised.

Volatility is the statistical dispersion of returns around their mean, typically expressed as an annualised percentage. Higher volatility implies a wider distribution of possible outcomes in either direction. It is the most commonly cited risk measure but says nothing about the direction or shape of those moves — fat-tailed distributions can have moderate volatility yet large rare losses.

— W —

WACC (Weighted Average Cost of Capital)

The blended required return across a firm's debt and equity, weighted by market value.

WACC weights the after-tax cost of debt and the cost of equity by their respective shares of the capital structure, producing the rate of return investors collectively require for funding the firm. It is the most common discount rate used in DCF valuation. Cost of equity is typically estimated with CAPM; cost of debt is the yield on outstanding debt adjusted for tax shield.

For educational and informational purposes only. Not investment advice. Definitions are general descriptions of concepts; specifics vary by jurisdiction, data source and implementation.