Risk & Portfolio
Beta
A measure of a stock's volatility relative to the market (S&P 500 = 1.0). Beta > 1 means more volatile; beta < 1 means less volatile; negative beta moves inversely to the market.
Beta = Covariance(Stock, Market) / Variance(Market)
Related Terms
Alpha
A measure of an investment's return above what would be predicted by its beta (market exposure). Positive alpha means the investment outperformed on a risk-adjusted basis.
Sharpe Ratio
Risk-adjusted return — how much excess return you earn per unit of volatility taken. Higher is better. A ratio above 1.0 is generally considered good.
Standard Deviation
A statistical measure of how spread out returns are from the average. Higher standard deviation = more volatile investment. Used as a proxy for risk in many models.
Correlation
How closely two assets move together. Ranges from −1 (perfectly inverse) to +1 (perfectly in sync). Adding low-correlation assets to a portfolio reduces overall risk.
Diversification
Spreading investments across different assets, sectors, or geographies to reduce unsystematic (company-specific) risk. Does not protect against systematic (market-wide) risk.
Drawdown
The peak-to-trough decline of an investment or portfolio over a specific period. Max drawdown is the largest historical drop from a peak before a new peak is reached.