Glossary
Short, citable definitions of the terms we use. Each starts with a one-sentence definition.
- Correlation
- Correlation measures, on a scale from −1 to +1, how closely two return series move together.
- Diversification
- Diversification is reducing portfolio risk by combining holdings that do not move in step with each other.
- Drawdown
- A drawdown is the percentage decline of a portfolio from its previous peak to a later low.
- Factor
- A factor is a measurable characteristic of securities — such as value or momentum — associated with differences in returns.
- Factor exposure
- Factor exposure measures how sensitive a portfolio’s returns are to a particular factor.
- Hedge overlay
- A hedge overlay is a separate set of positions that offsets part of a portfolio’s market exposure to reduce losses in declines.
- Hidden Markov model
- A hidden Markov model describes data generated by an unobserved state that switches between regimes with fixed probabilities.
- Market regime
- A market regime is a persistent state of market behaviour — for example calm or stressed — with its own typical returns, volatility and correlations.
- Momentum
- The momentum factor favours securities whose prices have risen more than their peers over recent months.
- Multifactor
- A multifactor portfolio combines several factors so that no single source of return dominates its results.
- Value
- The value factor favours securities that look inexpensive relative to measures such as earnings, book value or cash flow.
- Volatility
- Volatility is the standard deviation of returns, usually annualised, and is a common measure of risk.