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Glossary
Definitions, with the convention attached.
44 terms used across the tools on this site, in 7 groups. Each carries the convention it assumes as well as the definition, because a definition without its convention is what lets two correct calculators produce different answers to the same question — and most of the disagreements in this field are conventions, not arithmetic.
All terms
6 terms
Return and growth
Cumulative return
Also called total return.
The total change in value over the whole period, found by compounding each period’s return rather than adding them. Twelve monthly returns of 1% give 12.68%, not 12%.
Convention Compounded, not summed. Net of nothing unless the series itself is net.
Annualised return
Also called CAGR, compound annual growth rate.
The constant annual rate that would have produced the same cumulative return over the same length of time. It describes the outcome, not any year within it.
Convention Geometric. From n monthly returns: (1 + cumulative) raised to 12/n, minus 1. Undefined, and not shown, for a record shorter than a year.
Arithmetic mean return
Also called average return.
The simple average of the period returns. Always at least the compound return, and strictly greater whenever the returns vary at all.
Convention Sum divided by count. Annualised by multiplying by the number of periods a year, which is why it is not a growth rate.
Volatility drag
Also called variance drain.
The gap between the average return and the compound return. It is not a fee or a cost that anyone collects; it is an arithmetic consequence of multiplying rather than adding.
Convention Approximately half the variance a year, so about 0.5 points at 10% volatility and 2.0 points at 20%.
Sequence of returns risk
Also called sequence risk.
The effect of the order of returns on the final outcome. With no money going in or out the order is irrelevant; once there is a withdrawal, an early loss removes capital that cannot participate in a later recovery.
Convention Depends entirely on the cash flow assumed. Quoted without the withdrawal it is meaningless.
Rolling return
Also called window return.
The return over every window of a given length within a series, rather than over the series as a whole. It answers what the same strategy produced at different entry points.
Convention A series of n months gives n minus w plus 1 windows of length w. The windows overlap, so they are not independent observations.
11 terms
Risk and risk-adjusted return
Volatility
Also called standard deviation, realised volatility.
The dispersion of returns around their own mean. It measures variability in both directions and says nothing about the direction of the variation.
Convention Sample standard deviation with n minus 1 in the denominator, annualised by √12 from monthly data. That annualisation assumes the periods are independent.
Sharpe ratio
Return above the risk-free rate, per unit of volatility. The most quoted risk-adjusted measure and the most quoted without its margin of error.
Convention Excess return divided by volatility, both annualised. Sensitive to the risk-free rate assumed, and to whether the annualisation accounts for autocorrelation.
Sortino ratio
Return above the risk-free rate per unit of downside deviation, on the reasoning that upside variability is not a risk anyone needs compensating for.
Convention The denominator here is the root mean square of the shortfalls below the threshold, divided by the full count of observations rather than the count of shortfalls. Dividing by the count of shortfalls instead is also in use and gives a different, larger number.
Calmar ratio
Annualised return divided by the worst drawdown. Its denominator is a single observed event rather than a distribution, which makes it the least stable of the common ratios.
Convention Annualised return over the absolute value of maximum drawdown, measured over the same period. A longer record almost always lowers it, because a longer record contains a worse worst case.
Maximum drawdown
Also called peak-to-trough decline.
The largest fall from a previous high point to the subsequent low, measured on the compounding value rather than on any single period return.
Convention Computed on period-end values, so an intra-period fall that recovered is not captured. Reported as a negative number here.
Drawdown recovery
Also called gain required.
The gain needed to return to a previous peak after a fall. It is larger than the fall, because the gain is earned on the reduced amount.
Convention One divided by one minus the fall, minus one. A 20% fall needs 25%; a 50% fall needs 100%.
Value at risk
Also called VaR.
A loss that is not expected to be exceeded, over a stated period, with a stated probability. It says nothing about how bad the exceedance would be when it happens.
Convention Depends on the method. Historical VaR reads the quantile off the observed returns; parametric VaR assumes a distribution. The two routinely disagree, and the confidence level and the period must always be quoted with the figure.
Expected shortfall
Also called conditional VaR, CVaR, expected tail loss.
The average loss in those cases where the value-at-risk threshold is breached. It answers the question value at risk leaves open.
Convention The mean of the tail beyond the quantile. On a short record the historical figure is an average of very few observations, so the count in the tail matters as much as the figure.
Autocorrelation
Also called serial correlation.
The correlation of a series with its own previous values. Positive autocorrelation makes a return series look smoother than the underlying exposure is.
Convention Where it is present, annualising volatility by √12 understates risk and the Sharpe ratio is overstated. Common in appraisal-priced or infrequently traded holdings.
Skewness
The asymmetry of a return distribution. Negative skew means the large moves are more often losses than gains.
Convention Third central moment over the cubed standard deviation. Zero for a normal distribution. Needs a long record to estimate with any precision.
Excess kurtosis
Also called fat tails.
How much of the variance comes from rare large moves rather than ordinary ones. Positive excess kurtosis means more extreme observations than a normal distribution would produce.
Convention Fourth central moment over the fourth power of the standard deviation, minus three, so a normal distribution reads zero.
8 terms
Comparison and benchmarks
Correlation
Also called Pearson correlation.
How closely two series have moved together, on a scale from minus one to plus one. It measures a straight-line relationship only.
Convention Each series is measured against its own mean, so the level of either is irrelevant. A single figure describes the whole period and hides what happened in the tails.
Beta
How much of a benchmark’s movement a portfolio has tended to take on. A beta of 0.8 means the portfolio moved 0.8% for each 1% of benchmark movement, on average.
Convention The slope of a least-squares regression of the portfolio’s excess return on the benchmark’s. With a constant risk-free rate the slope on raw returns is identical.
Alpha
Also called Jensen’s alpha.
The part of a return the benchmark does not account for, once the portfolio’s beta to that benchmark is allowed for.
Convention The intercept of the same regression, annualised by multiplying by 12. It is defined relative to one benchmark and one period, and changes if either changes.
Tracking error
Also called active risk.
How much a portfolio’s return has varied from its benchmark’s. A low figure means the portfolio has stayed close, whether or not it stayed ahead.
Convention Standard deviation of the active return, portfolio minus benchmark, annualised by √12. The alternative convention measures the standard deviation of the regression residual instead, which differs whenever beta is not exactly one.
Information ratio
Return earned per unit of the risk taken in departing from the benchmark.
Convention Active return over tracking error, both annualised. Alpha over residual volatility is also called the information ratio and is a different number; the appraisal ratio is the clearer name for the second. Always ask which was used.
Upside and downside capture
Also called capture ratio.
The share of the benchmark’s gains a portfolio captured in the periods the benchmark rose, and the share of its losses in the periods it fell.
Convention Compounded over the qualifying periods and divided, which is the common convention. Taking the ratio of arithmetic means instead gives a different answer. Unstable when the benchmark’s compound return over the qualifying periods is near zero.
R²
Also called coefficient of determination.
The proportion of a portfolio’s variation that its benchmark accounts for. A low figure means the benchmark explains little, which also makes alpha and beta against it less meaningful.
Convention The square of the correlation between the two series, for a single-benchmark regression.
Benchmark
The alternative a portfolio is measured against. Choosing it decides what counts as skill, so it is a substantive decision rather than a presentational one.
Convention Must cover the same periods, the same currency basis and a comparable investable universe, or every relative statistic computed from it is misleading.
4 terms
Statistical evidence
Confidence interval
The range of true values consistent with an observed estimate, at a stated level of confidence. A wide interval is not a flaw in the method; it is the honest width of what the evidence supports.
Convention Here: the estimate plus and minus the critical value times the standard error, two-sided, assuming independent and identically distributed returns.
Standard error
How much an estimate would be expected to vary from one sample to another. It shrinks with the square root of the number of observations, not with the number itself.
Convention For a Sharpe ratio, approximately the square root of (1 plus half the squared ratio) over the number of observations.
t-statistic
How many standard errors an estimate sits away from zero. Roughly two is the usual informal threshold for treating a result as unlikely to be chance alone.
Convention For a Sharpe ratio, the ratio times the square root of the number of years, on the simple approximation.
Statistical significance
A finding that would be unlikely if there were no real effect. It is evidence against pure chance, and it is not a measure of size, importance or repeatability.
Convention Depends on a hypothesis chosen before looking. Selecting the best record from many and then testing it is a different question with a much higher bar.
5 terms
Fees and terms
Management fee
Charged on the amount invested, and payable whether or not the investment makes money.
Convention Usually accrued on the value at the point of calculation, so the amount paid moves with the balance. The base and the frequency both have to be stated for the figure to mean anything.
Performance fee
Also called incentive fee.
A share of the gain, payable to the manager when the investment makes money.
Convention The rate alone does not determine the cost. What it is charged on, whether it crystallises annually, and whether losses must be recovered first all change the amount.
High-water mark
The highest value previously reached, used so that a performance fee is charged only on gains above that level rather than on the recovery of a prior loss.
Convention Whether it resets, and when, is the whole substance of the protection it appears to offer.
Hurdle rate
Also called preferred return.
A return that must be achieved before a performance fee becomes payable.
Convention A hard hurdle charges only on the gain above it; a soft hurdle charges on the whole gain once it is cleared. The difference is large and the word "hurdle" alone does not say which.
Risk-free rate
The return available without taking investment risk, used as the baseline in any ratio that measures excess return.
Convention Changes every ratio that uses it. A Sharpe ratio quoted without the rate assumed cannot be reproduced or compared.
8 terms
Australian eligibility
Wholesale client
A person to whom a financial product or financial service may be provided without the disclosure and conduct protections owed to a retail client.
Convention Defined by exclusion in section 761G of the Corporations Act 2001: everyone is a retail client unless a limb of the test applies. In non-criminal proceedings the law presumes retail unless the contrary is established.
Sophisticated investor
Also called s708 investor.
A person to whom securities may be offered without a disclosure document such as a prospectus.
Convention Section 708 of the Corporations Act 2001. The term is also used loosely for the whole family of tests, which is the source of most of the confusion between Chapter 6D and Chapter 7.
Professional investor
A defined category of institutional and very large investors, who are outside the retail protections because of what they are rather than because of any document about them.
Convention Defined in section 9 of the Corporations Act 2001, and modified for the purposes of Parts 7.6 to 7.9 by regulation 7.6.02AE. No accountant’s certificate is involved.
Qualified accountant
A member of a professional body ASIC has declared, who may certify that a person meets the net asset or gross income test.
Convention Section 88B of the Corporations Act 2001, and the ASIC instrument in force under it. The declared bodies and membership classifications change when the instrument is remade, as it was in September 2026.
Accountant’s certificate
Also called s708 certificate.
The document by which a qualified accountant certifies that a person meets the net asset or gross income threshold.
Convention The Act says the certificate must be no more than 6 months old; regulations 6D.5.02 and 7.6.02AF substitute 2 years. Both periods are therefore quoted in the market, and which one applies depends on the provision engaged.
Product value test
Also called $500,000 test.
The limb that treats a person as wholesale because of the size of the particular investment, without reference to their wealth or experience.
Convention Section 708(8)(a) and (b) for offers, section 761G(7)(a) and regulation 7.1.18(2) for financial products. Money lent by the person making the offer does not count towards it.
Disclosure document
Also called prospectus.
The document that must ordinarily be given to an investor before securities are offered to them.
Convention A Chapter 6D concept. The Chapter 7 equivalent for a financial product is a Product Disclosure Statement, which is a different document under a different regime.
Retail client
The default status of every person under Chapter 7, carrying the full set of disclosure and conduct protections.
Convention Status is per product and per service, not per person, so the same investor can be wholesale for one investment and retail for another on the same day.
2 terms
Currency
Hedged return
Also called currency-hedged.
The return of a foreign holding with the currency exposure removed, leaving the local asset return plus the cost or benefit of the hedge.
Convention Not equal to the local return. A hedge earns approximately the interest rate differential between the two currencies, which can be positive or negative.
Unhedged return
The return of a foreign holding measured in the investor’s own currency, combining the local return and the currency movement.
Convention The two compound rather than add, so there is a cross term. An additive decomposition of an unhedged return is always slightly wrong.
How to use this
Where the conventions bite.
- Ask what the denominator is. Sortino, the information ratio and tracking error all have two conventions in common use, and in each case the two give different numbers from the same data. A figure quoted without its denominator cannot be compared with anything.
- Ask how it was annualised. Returns compound, means multiply, standard deviations take the square root of time. Mixing them, or applying the square-root rule to a series whose periods are not independent, changes the answer by more than most of the differences being argued about.
- Ask what the risk-free rate was. Every excess-return ratio moves with it, and a Sharpe ratio quoted without it cannot be reproduced.
- Ask how long the record is. Almost every statistic here is an estimate with a margin of error that shrinks only with the square root of the record length. The ratio interpreter gives the interval; the significance calculator gives the record length a given ratio would need.
- For the Australian eligibility terms, ask which chapter. The wholesale and sophisticated tests share their figures and not their conditions. The decision map sets out which applies to a given transaction.
These definitions are provided for general information only and are directed to wholesale and professional investors. They are not personal advice: they do not take into account the objectives, financial situation or needs of any person, and nothing here is an offer, invitation or recommendation to acquire any financial product. Investing involves risk, including the possible loss of capital. Past performance is not a reliable indicator of future performance.