Rebalancing

Alpha

The excess return of an investment relative to a benchmark index. Positive alpha indicates the investment has outperformed its benchmark on a risk-adjusted basis. Generating consistent alpha is the primary goal of active investment management and buy-side research.

Beta

A measure of a stock's volatility relative to the overall market. A beta greater than 1 indicates the stock tends to move more than the market; less than 1 indicates lower sensitivity. Used in the CAPM model to calculate expected returns and in portfolio construction to manage systematic risk.

Sharpe Ratio

A measure of risk-adjusted return, calculated by dividing an investment's excess return over the risk-free rate by its standard deviation. Higher values indicate better return per unit of risk. A Sharpe ratio above 1 is generally considered good; above 2 is excellent.

Drawdown

The peak-to-trough decline in the value of a portfolio or investment before a new high is reached. Maximum drawdown is a key metric for assessing downside risk and is often more intuitive to investors than statistical measures like standard deviation.

Volatility

A statistical measure of the dispersion of returns for a security or market index. Higher volatility indicates greater uncertainty and is often associated with higher risk. Implied volatility, derived from option prices, reflects market expectations about future price movements.

Diversification

The practice of spreading investments across different assets, sectors, or geographies to reduce portfolio risk. Based on the principle that different assets often perform differently under the same market conditions. Often described as 'the only free lunch in finance.'