Portfolio Management Glossary

The excess return of a portfolio relative to its benchmark or the return predicted by a pricing model such as CAPM.

The distribution of investment capital among different asset classes such as equities, fixed income, cash, and alternatives.

A standard or index against which portfolio performance is measured, such as the S&P 500 for US large-cap equities.

A measure of a security's or portfolio's volatility relative to the overall market. A beta of 1.0 indicates market-level sensitivity.

A model that describes the relationship between systematic risk and expected return, used to estimate the appropriate required rate of return for an asset.

A statistical measure between -1.0 and +1.0 describing how two assets move in relation to each other.

The practice of spreading investments across various assets to reduce the impact of any single holding's poor performance on the total portfolio.

An investment strategy of regularly investing a fixed dollar amount regardless of the asset's current price.

The peak-to-trough decline in the value of a portfolio before a new peak is achieved, typically expressed as a percentage.

The set of portfolios that offers the maximum expected return for each level of risk or the minimum risk for each level of expected return.

The theory that asset prices fully reflect all available information, making it impossible to consistently achieve above-market returns.

The additional return that investors demand for holding equities over risk-free assets such as government bonds.

A class of investments, primarily bonds, that pay a fixed or predictable stream of interest income and return principal at maturity.

A measure of portfolio returns above a benchmark relative to the volatility of those excess returns (tracking error).

A document establishing the guidelines, objectives, and constraints for managing an investment portfolio.

The ease with which an asset can be converted to cash without significantly affecting its market price.

A framework for constructing portfolios that maximize expected return for a given level of risk through diversification across imperfectly correlated assets.

Analysis that decomposes portfolio returns into components attributable to asset allocation decisions, security selection, and other factors.

The process of realigning portfolio weights to target allocations by buying underweight assets and selling overweight ones.

The theoretical return on an investment with zero risk, typically proxied by short-term government securities such as US Treasury bills.

A measure of risk-adjusted return calculated as the portfolio's excess return over the risk-free rate divided by its standard deviation.

A statistical measure of the dispersion of portfolio returns around the mean, commonly used as a proxy for total investment risk.

Market-wide risk that cannot be eliminated through diversification, arising from macroeconomic factors such as interest rates, inflation, and recessions.

The standard deviation of the difference between a portfolio's returns and its benchmark's returns, measuring how closely a portfolio follows its benchmark.

Risk specific to an individual company or industry that can be eliminated through diversification.