Understand what drives the risk.

Basis

The difference between related spot and derivative prices. Sign and annualization conventions must be stated.

Basis point

One hundredth of one percentage point: 100 bps equals 1%.

Carry

A return component associated with holding an exposure over time, conditional on pricing and financing assumptions.

Convexity

Curvature in the relationship between a position value and a risk factor. A linear approximation omits this effect.

Covariance

A measure of joint variation. Portfolio variance is computed from both individual variances and cross-covariances.

Delta

The local first derivative of an instrument value with respect to its underlying price.

Gamma

The local rate of change of delta with the underlying price; a second-order sensitivity.

Vega

Local sensitivity to implied volatility, with the quoted volatility unit specified.

Theta

Sensitivity to the passage of time under a specified convention. Its sign and units depend on the position.

Gross exposure

Total absolute exposure relative to capital. In this long-only sleeve model, it is the user-selected multiplier L.

Excess return

A return convention expressed relative to a specified financing or reference component. It is not a synonym for outperformance.

Maximum drawdown

The largest peak-to-subsequent-trough decline in the observed series. It says nothing about unobserved paths.

Value-at-risk

A model-dependent loss quantile for a stated horizon and confidence level, not a maximum possible loss.

Expected shortfall

The mean loss in the tail beyond a stated confidence threshold, given a specified loss distribution.

Risk contribution

A component attribution of a chosen risk measure, such as each sleeve’s contribution to portfolio volatility.

Turnover

The magnitude of portfolio changes under a specified convention. One-way and two-way definitions differ.

Reconstitution

A change to the index membership or eligible set, distinct from changing the weights of existing members.

Hysteresis

Different entry and exit conditions intended to reduce frequent state switching near a threshold.

Liquidity horizon

An assumed period needed to exit or hedge a position. It may lengthen in stressed markets.

Model risk

The possibility that a result is wrong or misleading because its assumptions, estimates, implementation or usage are inadequate.

Brief working definitions for this research concept. Instrument conventions, legal terms and venue-specific rules can differ.