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 Alpha is a measure of the return that is not attributable to market performance or risk level of the strategy. Alpha represents the value a manager adds to the performance of the portfolio over the market. It measures the return of the manager due to his ability to provide value-added returns to the strategy, rather than just participating in a bull market. Beta measures the price volatility of the portfolio in comparison to a specific benchmark. A portfolio that has a beta of 1 should increase 10% when market prices increase 10%. A fund with a beta of 1.10 is expected to perform 10% better than the market in a rising market, but 10% worse in a declining market. A portfolio with a beta of less than 1.0 indicates that it is less volatile than the market or index. Efficient Frontier is the combinations of portfolios that maximize expected return for any level of expected risk, or that minimizes expected risk for any level of expected return. Pioneered by Harry Markowitz. Portable Alpha is the strategy of managers separating alpha from beta by investing in securities that differ from the market index from which their beta is derived. Alpha is the return achieved over and above the return that results from the correlation between the portfolio and the market (beta). In simple terms, this is a strategy that involves investing in areas that have little to no correlation with the market. R Squared is a measure of the diversification of the portfolio, and indicates the extent to which fluctuations are explained by market results. A portfolio that has R Square equaling 1.0 indicates that 100% of the returns are market determined. Standard Deviation is a statistical measure of risk which represents the variability of returns around the mean (average) return. The lower the standard deviation, the closer the returns are to the mean (average) value. Conversely, the higher the standard deviation, the more widely dispersed the returns are around the mean (average). Often referred to as "Volatility". Sharpe Ratio is a risk measure that evaluates the relationship of return and volatility. It gives investors the ability to determine how much excess return a manager can produce for the increase in risk that the investor assumes. By dividing the portfolio’s excess return, defined as the return above the risk free rate received by US Treasury bills, by the standard deviation of the portfolio, investors can determine the additional return per unit of risk. The higher the Sharpe Ratio, the greater return per unit of risk. Sigma is a derivative pricing model that measures effect of volatility. The term is used interchangeably with vega and kappa, omega and zeta. Sortino Ratio calculates downside risk with regard to a specific targeted return. This ratio is complicated by the fact that data may not exist for an extended period of declining securities prices. Value-at-Risk Model (VaR) Procedure for estimating the probability of portfolio losses exceeding some specified proportion based on a statistical analysis of historical returns, trends, correlations and volatilities. |
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