Glossary of Terms

The average annual return for a portfolio over the period tested.  This is the geometric average (CAGR – compound annual growth rate) and not the arithmetic average.

The average annual return for a portfolio over the last ten years.  This is the geometric average (CAGR – compound annual growth rate) and not the arithmetic average.

A value used to help investors understand the risk vs. reward of an investment.  The higher the number, the better the returns relative to risk. 

The ratio is the average return earned in excess of the risk-free rate per unit of volatility (or one standard deviation).

The measure of how far you can expect a portfolio to swing in a positive or negative direction over time. 

For example, two portfolios could end up with the same returns at the end of the year, but one could have had very large up and down movements while another is much steadier and less turbulent. 

In most cases, the higher the number, the riskier the portfolio.  

The top to bottom decline of a portfolio during a specific period. 

As an example, if a portfolio was at $10,000 and it dropped to $9,000 before going back above $10,000, then the portfolio saw a 10% drawdown.

The worst top-to-bottom decline of a portfolio over the tested period of time. 

A portfolio will experience many drawdowns over a period of time, but this is the largest drop the portfolio has experienced over the tested period. 

A value of -50% would mean the portfolio lost 50% of it’s value relative to it’s all time high at some point.

The percentage of months where the portfolio had positive returns.

The average annual returns (CAGR) from 2000 to 20002 during the Dot Com bubble.

The average annual returns (CAGR) from 2007 to 2009 during the Great Financial Crisis. 

Breaks the tested period of a portfolio into smaller chunks of time.  The Rolling Return is the annualized average return over that smaller chunk. 

As an example, a 5-year Rolling Return will break down a test period of January 1999 to December 2019 into five year chunks (1/1999 to 1/2004, 2/1999 to 2/2004, 3/1999 to 3/2004, etc…).  The rolling return will calculate the average annual return (CAGR) over each 5-year period.

The low would be the lowest 5-year chunk over that January 1999 to December 2019 time period.

The average would be the average return of all the 5-year chunks.

The high would be the highest 5-year chunk over the larger tested period.

Rolling Returns paint a more accurate picture for investors of how a portfolio will perform over any given period of time vs. one snapshot over 20+ years. 

A calculation of the annual return for a series of 1-Year periods.

For example, instead of calculating the annual return from 1980-2020, the three year rolling return would break those 40 years down into 1-year segments and provide an annual return for each segment.

You could then look at the highest 1-year period, the lowest period, and the average 1-year annual return over those 40 years.

A calculation of the annual return for a series of 3-Year periods.

For example, instead of calculating the annual return from 1980-2020, the three year rolling return would break those 40 years down into 3-year segments and provide an annual return for each segment.

You could then look at the highest 3-year period, the lowest period, and the average 3-year annual return over those 40 years.

A calculation of the annual return for a series of 5-Year periods.

For example, instead of calculating the annual return from 1980-2020, the three year rolling return would break those 40 years down into 5-year segments and provide an annual return for each segment.

You could then look at the highest 5-year period, the lowest period, and the average 5-year annual return over those 40 years.

A calculation of the annual return for a series of 10-Year periods.

For example, instead of calculating the annual return from 1980-2020, the three year rolling return would break those 40 years down into 10-year segments and provide an annual return for each segment.

You could then look at the highest 10-year period, the lowest period, and the average 10-year annual return over those 40 years.

A portfolio where the assets are purchased once based on a set allocation percentage and held forever without any changes. 

The possible exception would be to rebalance the portfolio and bring each asset back to it’s original percentage allocation.

A portfolio where the percentage of each asset held in the portfolio will change on a regular basis.  Typically monthly or daily.  

The changes are triggered by a set of rules that govern the portfolio.

Building a portfolio based on an individuals goals, risk tolerance, and investment timeline using the three main asset classes: equities, fixed-income, and cash. 

A calculation of the downside volatility in a portfolio.

The longer and deeper a drawdown, the higher the ulcer index.

A higher number means more downside volatility.

A way to determine the risk vs. reward for a portfolio.

Similar to the Sharpe Ratio but instead of using standard deviation as a risk measure, it uses the Ulcer Index.

A higher number, in theory, equates to better returns relative to risk.