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Glossary of Technical Terms
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Alpha:
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An investment's Alpha indicates the return it is expected to earn, on average, when the market is flat.
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Annualized return:
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The average compound annual return for a period greater than 1 year.
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Beta:
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The Beta of an investment indicates whether or not it tends to move in the same direction as the market, and by how much. Positive Betas indicate that the investment's price generally moves in the same direction as the market, whereas negative Betas indicate that it moves in an opposite direction. The ideal portfolio has a high Beta in rising markets, and a low or negative Beta in falling ones.
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Correlation:
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Correlation measures the degree to which two investments tend to move in step. This number is always between -1 and 1 (-100% to 100%). A correlation of 1 indicates that the investments behave identically; a correlation of -1 indicates that one investment always has an exactly opposite move to the other.
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High water mark:
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A common approach to the calculation of incentive fees. It means that incentive fees are paid only on net new rises in asset value. If a temporary decline occurs, it must be recouped before new incentive fees are paid.
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Maximum drawdown:
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This is the largest overall drop in the investment's value which occurred in a given period before it returned to its previous high. Large maximum drawdowns indicate higher risk.
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R-squared:
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The R-squared statistic, whose value falls between 0 and 1, indicates the strength of the relationship between an investment and the market, and the degree to which other statistics describing the behavior of the investment, such as the Beta, are reliable. One could say that the R-squared statistic would determine the end to be applied to the following statement: "My investment has a Beta of 1.5, which indicates that market moves are amplified by 1.5. A 10% rise in the market will cause a 15% rise in my investment...". As the R2 increases towards 1, the statement's end would change from "on average, with a considerable degree of error," to "most of the time," to "nearly always," to "with near certainty," to "in all cases."
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Sharpe ratio:
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The Sharpe ratio allows comparison of risk/return between two or more investments. Higher Sharpe ratios are preferable to lower ones. An investment's Sharpe ratio is its return over the risk-free rate (such as the 90-day US Treasury Bill rate) divided by its volatility.
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Time to recovery:
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Is the longest period in months, after a drop in value, it takes an investment to return to its previous high.
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Volatility (Risk):
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Volatility is measured by the standard deviation of returns around their mean. This measure gives the level of a manager's risk, or of a portfolio's risk. The higher the volatility, the riskier the investment.
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