General

• Asset’s systematic risk

• Sensitivity to movements in broader market or benchmark

• Asset’s return explained by market-wide factors rather than asset-specific (idiosyncratic) factors

• β = 1: in line with market

• β > 1: more volatile than market

• β < 1: less volatile than market

• β < 0: opposite to market

• Risk-adjusted performance relative to what would have been expected given beta

• α > 0: asset outperformed the level predicted by risk exposure (“positive skill”)

• α < 0: asset underperformed relative to expected return

• α = 0: Performance explained by systematic risk

Financial contract whose value is derived from the value of an underlying asset, index, rate, event, or other reference variable.

• Equities

• Bonds

• Interest rates

• Commodities

• Credit instruments

• Market indexes

• Derivative contract that gives buyer right to purchase at predetermined strike price before/on expiration date

• Paying option premium

• Seller has the obligation to sell if the buyer exercises option

• Closing out position nearing expiration

• Simultaneously open new position with later expiration

• To maintain exposure to an asset without taking physical delivery

• To avoid expiration of futures or options

• To adjust duration, strike, or risk profile

• Derivative contract that gives seller right - not obligation - to sell at predetermined strike price before/on expiration date

• Seller has the obligation to sell if the buyer exercises option

• Difference between two prices, rates, or yields

• Measures how far apart two related values are

• Assess cost, value, or relative risk

• How much apart are individual data points differ from another or central value

• Market condition in futures market

• Futures prices > current spot price

• Occurs when high carrying costs / weak immediate delivery demand

• Market condition in futures market

• Futures prices < current spot price

• Occurs when strong demand for immediate delivery

• The return from the change in futures prices as a contract approaches spot and is rolled forward

• Arises from difference between futures prices across maturities

• Fixed Income

• Currencies

• Commodities

• Risk reduction strategy to protect against potential losses

• Taking opposite / protective position

• Protective put

• Equity Index Hedge

• Covered call

• Investor buys put option on own position —> limit downside risk

• Able to sell at strike price if price falls

• Shorting equity index futures (S&P futures) to offset market-wide risk

• For stocks correlated with index

• investor sells call option on position to generate premium income

• Partial downside cushion

• Capping upside potential

• Predetermined price at which an option can be excercised

• Strike price is not asset value

• Can exercised at any time; but only makes sense when value > strike

• Current market price for immediate delivery / settlement

• Price/rate agreed today for future settlement

• Used to price, hedge or commit to future transactions

• Graph showing relationship of interest rates (yields) vs. maturities

• Average: sum of all values / number of values

• Sensitive to extremes

• Measure of how asymmetrical a distribution is around its mean

• Right Tail = Positive Tail —> positively skewed (chance of big gains)

• Left Tail = Negative Tail —> negatively skewed (chance of big losses)

• Value in the middle of ordered dataset

  • odd number of values —> median: middle one

  • even number of values —> median: average of two middle

• Robust to extremes

• Kurtosis: measures tailedness (extremeness) of distribution

• Excess Kurtosis: measures tailedness (extremeness) of distribution

• Measures tailedness (extremess) of distribution

• Normal distribution = kurtosis value of 3

  • Value > 3 = fat tails

  • Value < 3 = thin tails

• Measures how kurtosis compares to a normal distribution

• Excess kurtosis = kurtosis - 3

  • Positive —> more extreme events than normal

  • Negative —> fewer extreme events than normal

• Normal distribution = excess kurtosis = 0

• Measures spread of an entire dataset around its mean

  • High SD = values vary a lot

  • Low SD = values cluster tightly

• Investments that pay fixed, regular interest and return principal at maturity (e.g., bonds)

• Type I Error —> False positive: sth exists when is not

• Type II Error —> False Negative: nothing is happening but actually is

• Measures risk-adjusted return —> comparing excess return to total volatility

• Positive sharpe = 0 —> : Portfolio earns returns above the risk-free rate per unit of risk

• Peak-to-trough decline in portfolio value over a specified period

• Percentage loss from highest equity value before recovery

• Largest / worst drawdown over entire period

• Targeting positive returns regardless of market direction

• Performance is measured in absolute terms (e.g., +5 percent) rather than to benchmark

• Risk-controlled & consistent return generation across market cycles