Glossary · 10 terms
Portfolio Management
All portfolio management terms in the EquitiesAmerica.com glossary — plain-English definitions for American investors.
Active vs Passive Management(active investing vs passive investing)
Active management involves portfolio managers making deliberate security selection and timing decisions in an attempt to outperform a benchmark, while passive management seeks to replicate a benchmark index at minimal cost with no attempt to beat it.
Alpha(Jensen's alpha)
Alpha is a measure of an investment's or portfolio manager's performance relative to a benchmark index, representing the excess return generated above what would be predicted by the portfolio's market exposure alone.
Benchmark(reference index)
A benchmark is a standard index or reference portfolio against which the performance of an investment strategy or fund manager is measured and evaluated.
Beta(market beta)
Beta is a measure of an investment's sensitivity to movements in the overall market, with a beta of 1.0 indicating that the asset moves in line with the market and higher or lower values indicating greater or lesser volatility relative to the market.
Correlation(correlation coefficient)
Correlation is a statistical measure ranging from -1 to +1 that quantifies the degree to which two assets tend to move together, and is a foundational input in portfolio construction and diversification analysis.
Efficient Market Hypothesis(EMH)
The Efficient Market Hypothesis (EMH) is an academic theory asserting that asset prices fully reflect all available information at any given time, making it impossible to consistently achieve above-average returns through stock picking or market timing.
Modern Portfolio Theory(MPT)
Modern Portfolio Theory (MPT) is a mathematical framework developed by Harry Markowitz in 1952 for constructing investment portfolios that maximize expected return for a given level of risk by optimally diversifying across assets.
Monte Carlo Simulation(Monte Carlo method)
Monte Carlo simulation is a computational technique that uses repeated random sampling to model the probability distribution of possible outcomes for an investment portfolio or financial plan under conditions of uncertainty.
Sharpe Ratio(Sharpe index)
The Sharpe ratio measures risk-adjusted return by calculating how much excess return an investment generates per unit of total risk (standard deviation), allowing meaningful comparison between investments with different risk profiles.
Standard Deviation(volatility)
Standard deviation is a statistical measure of the dispersion of returns around the average, used in finance as the primary measure of investment volatility and total risk.