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Glossary

A fast look-up for vocabulary used across this curriculum — one line per term, not a substitute for the full reference page it links to. If a term you need isn't here, check the reference index directly; not every page has a glossary entry, but every glossary entry has a page.

Portfolio foundations

  • Portfolio return — the weighted-average return of a portfolio's holdings, w'r. More →
  • Covariance — how two assets' returns move together; the off-diagonal entries of a covariance matrix. More →
  • Portfolio volatility — sqrt(w'Sigma*w), the standard deviation of portfolio return. More →
  • Risk contribution — how much of total portfolio volatility each position accounts for; splits into marginal (MCR) and component (CR). More →
  • MCTE / CCTE — marginal/component contribution to tracking error — the same idea as risk contribution, but against a benchmark instead of in absolute terms. More →
  • Group risk decomposition — aggregating position-level risk contribution by sector, country, or any other label. More →
  • Sharpe ratio — excess return per unit of total volatility, (mean(r) - rf) / std(r). More →
  • Downside deviation — like volatility, but counting only shortfalls below a target — the denominator of the Sortino ratio. More →
  • Realized (ex-post) risk — volatility or tracking error measured from an actual return history, as opposed to predicted from a covariance matrix (ex-ante). More →
  • Drawdown — the peak-to-trough decline in cumulative portfolio value. More →
  • Benchmark basics — active weight (w_p - w_b), active return, and the vocabulary of benchmark-relative investing. More →
  • Tracking error (TE) — the volatility of active return, sqrt(a'Sigma*a). More →

Optimization

  • Mean-variance optimization (MVO) — choosing portfolio weights to maximize mu'w - (lambda/2)*w'Sigma*w, the classic return-vs-risk tradeoff. More →
  • Efficient frontier — the curve of portfolios offering the lowest risk for each level of expected return. More →
  • Global minimum variance (GMV) — the single lowest-volatility point on the frontier, ignoring expected return entirely. More →
  • Tangency portfolio — the frontier point with the highest Sharpe ratio; every investor's optimal risky-asset mix under Tobin separation. More →
  • Minimum tracking error — the benchmark-relative optimization analogue of GMV: weights that minimize active risk instead of absolute risk. More →

Active management

  • Information ratio (IR) — active return per unit of active risk, active_return / tracking_error. More →
  • Information coefficient (IC) — the correlation between a manager's forecasts and what actually happened; the raw measure of forecasting skill. More →
  • Breadth (BR) — the number of independent investment bets; correlated bets count for less than their raw number (effective_breadth). More →
  • Transfer coefficient (TC) — how well real-world constraints let a manager implement their unconstrained-optimal bets; 1.0 = no cost from constraints. More →
  • Fundamental Law of Active Management — IR ~= IC * sqrt(BR) * TC, linking skill, opportunity, and implementation into one expected-IR estimate. More →
  • Active share — half the sum of absolute active weights; how much of a portfolio differs from its benchmark by market value. More →

Risk models

  • Factor model — decomposing return/risk into common (factor) and idiosyncratic (specific) pieces, Sigma = B F B' + D. More →
  • Factor exposure — a portfolio's sensitivity to a given factor, w'B. More →
  • Value at Risk (VaR) — the loss not expected to be exceeded over a horizon at a given confidence level. More →
  • Expected Shortfall (ES) — the average loss given that VaR is breached; always worse than VaR at the same confidence. More →
  • Stress testing / scenario analysis — "what happens under this specific, named shock," as distinct from VaR's statistical-confidence framing. More →
  • Look-ahead bias — using a value in a decision dated before that value was published; usually a revision, not a future price. More →
  • Survivorship bias — measuring only the names still in the dataset, so defaults and closures never drag the average down. More →
  • Point-in-time data / vintage — the dataset exactly as it stood on a given date; what a replayable backtest must read instead of today's revised series. More →

Fixed income

  • Accrued interest — coupon earned by the seller since the last payment date, added to the quoted price at settlement. More →
  • Clean price / dirty price — the quoted price versus the price actually paid (clean + accrued). More →
  • Day-count convention — the rule (30/360, ACT/360, ACT/365, ACT/ACT) converting dates to a year-fraction for accrual; part of the bond's terms, not a formatting choice. More →
  • Settlement date — the date cash and bond actually change hands, and the date accrued interest is measured to. More →
  • Duration — the sensitivity of a bond's price to a small yield change, in years. More →
  • DV01 — the dollar price change of a bond for a 1bp yield move; duration expressed in dollars, not years. More →
  • Convexity — the second-order (curvature) correction to the duration approximation. More →
  • Key-rate duration (KRD) — sensitivity to a yield change at one specific point on the curve, holding the rest fixed. More →
  • Spread duration — a credit bond's price sensitivity to a change in its spread, holding the underlying rate curve fixed. More →
  • Z-spread — the constant spread added to the zero curve that reprices a bond to its market price. More →
  • OAS (option-adjusted spread) — Z-spread with the value of an embedded option stripped out. More →
  • CDS (credit default swap) — an instrument that pays out on an issuer's default; the CDS-bond basis compares its implied spread to the cash bond's. More →
  • Prepayment (CPR / SMM / PSA) — the rate at which mortgage borrowers repay principal early, and the standard conventions for quoting that speed. More →
  • Effective duration — numerical (bump-and-reprice) duration, needed when price isn't a closed-form function of yield (e.g. MBS). More →
  • Negative convexity — a bond (typically MBS) whose duration lengthens when rates rise and shortens when rates fall — the opposite of normal convexity. More →
  • Carry — the funding-adjusted income earned from holding a bond over time, (running_yield - financing_rate) * horizon_years. More →
  • Rolldown — the price gain (or loss) from a bond aging into a shorter point on an unchanged yield curve. More →
  • Repo / specialness — repurchase agreements are how a bond position is actually financed; "special" means a specific bond's repo rate trades below general collateral because it's in unusually high demand to borrow. More →
  • On-the-run / off-the-run — the most recently auctioned Treasury of a given maturity (on-the-run, most liquid) versus every earlier issue of that maturity (off-the-run, usually cheaper for equivalent cash flows). More →
  • TIPS / breakeven inflation — Treasury Inflation-Protected Securities adjust principal with CPI; breakeven inflation is nominal_yield - real_yield, the market's implied inflation expectation. More →
  • Leverage / coverage ratios — leverage_ratio = total_debt / EBITDA and interest_coverage_ratio = EBITDA / interest_expense, the core fundamental credit-analysis metrics behind bond and loan covenants. More →
  • Credit index (CDX / iTraxx) — a basket of single-name CDS trading as one instrument; its basis is the traded spread minus the weighted-average (intrinsic) spread of its constituents. More →
  • Leveraged loan — senior secured, floating-rate debt from a below-investment-grade borrower, priced on a discount-margin basis rather than a fixed yield. More →
  • TBA (to-be-announced) / dollar roll — generic forward trading of agency MBS without specifying exact pools; a dollar roll sells near-month and buys back far-month, usually at a lower ("dropped") price, functioning as short-term financing. More →
  • Specified pool / pay-up — an identified MBS pool traded for its specific collateral characteristics (e.g. low loan balance), commanding a price premium over generic TBA for more predictable prepayment. More →
  • CMO / REMIC, PAC / support tranche — a CMO carves one MBS pool into multiple tranches with different principal-payment priority; a PAC tranche gets a predictable schedule within a prepayment band, a support tranche absorbs the resulting variability. More →

Equity

  • Dividend discount model (DDM) — valuing a share as the present value of its future dividends. More →
  • CAPM / beta — the Capital Asset Pricing Model prices required return as rf + beta*(market_return - rf); beta is systematic risk relative to the market. More →
  • Equity factor investing — targeting stock returns through style characteristics (value, momentum, quality, size, low-vol) rather than single-market beta alone. More →
  • Shareholder yield — dividend yield plus buyback yield; the total cash a company returns to shareholders. More →

FX

  • Covered interest parity (CIP) — the forward FX rate is a mechanical function of the two currencies' interest-rate differential, F = S * (1 + r_domestic*T) / (1 + r_foreign*T), not an independent forecast of future spot. More →
  • Cross-currency basis — the gap between the actual market forward and the forward pure CIP implies; persistently nonzero in practice due to funding constraints and dollar-funding demand. More →
  • FX carry — the interest-rate differential earned (or paid) holding a foreign currency unhedged, r_foreign - r_domestic; hedging removes it along with the currency risk. More →

Commodities

  • Roll yield / contango / backwardation — the return from replacing an expiring futures contract with the next-dated one; positive in backwardation (near price above far), negative in contango (near price below far). More →

Attribution and implementation

  • Brinson attribution — decomposing active return into allocation, selection, and interaction effects. More →
  • Carry / curve / spread decomposition — the fixed-income-specific version of attribution, splitting return into what you earned for waiting (carry), curve moves, and spread moves. More →
  • Turnover — how much of a portfolio is traded to move from current to target weights. More →

Advanced portfolio construction

  • Covariance shrinkage — blending a noisy sample covariance matrix toward a more stable target to reduce estimation error. More →
  • Black-Litterman — combining a market-implied equilibrium prior with an investor's own views into posterior expected returns. More →
  • Risk parity — allocating capital so every position contributes equally to total risk, rather than equal capital weight. More →

Working with this repo

  • Ex-ante vs. ex-post — forward-looking (predicted from a model, e.g. a covariance matrix) vs. backward-looking (measured from what actually happened). Comes up throughout risk: portfolio_volatility is ex-ante, realized_volatility is ex-post.
  • PREDICT / MANUAL FIRST / HAND CALCULATION / ORAL CHECK — this repo's own notebook vocabulary for its learning cycle; see notebooks/foundations/00_orientation.ipynb and AGENTS.md.
  • Conceptual-only — a topic this repo deliberately explains but doesn't implement in code, with a stated reason why (e.g. OAS, hierarchical risk parity). Not a gap — a documented scope decision.