Risk

• AlphaReturn above what the risk taken would ordinarily have earned — the part attributable to skill.
• Basis riskThe risk that a hedge and the thing it hedges stop moving together.
• BetaHow much an investment tends to move when the market moves, with 1.0 meaning it moves in line.
• Black swanA rare, high-impact event that was not predicted and is explained confidently afterwards.
• Capital asset pricing modelA model saying an asset’s expected return depends on the risk-free rate plus its market risk.
• Conditional value at riskThe average loss on the bad days that VaR excludes.
• Counterparty riskThe risk that the other side of a contract fails to do what it promised.
• Currency riskThe risk that exchange-rate moves change your return on a foreign holding.
• Downside deviationVolatility calculated using only the returns below a threshold, ignoring upside moves.
• DrawdownThe fall from a portfolio’s previous peak to its lowest point before it recovers.
• Fat tailsThe tendency of extreme market moves to happen far more often than standard statistics predict.
• HedgingTaking an offsetting position to reduce a specific risk you do not want.
• Inflation riskThe risk that rising prices erode what your money can buy, even when the number grows.
• KurtosisHow much of a distribution sits in its extreme tails rather than near the middle.
• Liquidity riskThe risk of not being able to sell when you want to, without accepting a bad price.
• Maximum drawdownThe largest peak-to-trough fall a portfolio or strategy suffered over the period examined.
• Monte Carlo simulationRunning thousands of randomised return paths to see the range of outcomes a plan could produce.
• Normal distributionThe symmetric bell-shaped curve that much of finance assumes returns follow.
• Recovery periodHow long it took a portfolio to climb back to its previous peak after a fall.
• Scenario analysisExamining portfolio outcomes across several plausible futures rather than forecasting one.
• SkewnessWhether a return distribution leans towards large gains or large losses.
• Standard deviationA statistical measure of how far values typically sit from their average.
• Stress testModelling what a portfolio would do under a specific severe scenario, rather than under average conditions.
• Systematic riskRisk that affects the whole market and cannot be removed by holding more things.
• Tail-risk hedgingDeliberately paying a small ongoing cost to limit losses in a severe market fall.
• Underwater periodAny stretch of time during which a portfolio is worth less than its previous high.
• Unsystematic riskRisk unique to one company or industry, which diversification can largely remove.
• Value at riskAn estimate of the most you would expect to lose over a period, at a stated confidence level.
• VolatilityHow much an investment’s returns bounce around their average — the standard measure of risk.
• Volatility dragThe way volatility reduces compounded returns below the simple average of the yearly returns.

Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.