Financial Education

Lexicon v1

Comprehensive financial glossary with 154+ terms

of 154 terms

Hedge

Risk

Position to offset risk (e.g., options, futures)

Hedging involves taking an offsetting position to reduce risk from an existing position. Common hedges include options, futures, and forward contracts... ...read more

risk management derivatives offsetting positions portfolio protection

Portfolio Diversification

Risk

Spreading risk across assets/factors to reduce idiosyncratic volatility

Diversification spreads investments across uncorrelated assets to reduce unsystematic risk. Modern Portfolio Theory shows proper diversification can o... ...read more

risk management asset allocation correlation systematic risk

Position Sizing

Risk

Determining how much capital per trade/asset; risk management core

Position sizing determines capital allocation per investment based on risk tolerance. Methods include fixed percentage, equal weighting, or Kelly Crit... ...read more

risk management capital allocation portfolio construction risk tolerance

Risk Premium

Risk

Excess return over risk-free rate demanded by investors

Risk premium compensates investors for bearing risk beyond the risk-free rate. Formula: Expected Return - Risk-Free Rate. Equity risk premium averages... ...read more

expected return risk compensation asset pricing equity premium

Risk-Adjusted Return

Risk

Return scaled by risk (Sharpe, Sortino, Information ratio)

Risk-adjusted returns account for volatility and risk taken. Sharpe ratio divides excess return by volatility. Sortino focuses on downside deviation.... ...read more

performance measurement volatility adjustment risk management portfolio evaluation

Sharpe Ratio

Risk

(Return − Risk-free) / Volatility

Sharpe ratio measures risk-adjusted returns by dividing excess return by volatility. Formula: (Portfolio Return - Risk-Free Rate) / Portfolio Volatili... ...read more

risk-adjusted returns volatility performance measurement portfolio evaluation

Standard Deviation

Risk

Dispersion measure of returns; input to many risk metrics

Standard deviation measures return variability around the mean. Higher values indicate greater volatility. Used in Sharpe ratio, VaR calculations, and... ...read more

volatility measurement risk metric statistical dispersion portfolio analysis

Systematic Risk

Risk

Market-wide risk that can't be diversified away

Systematic risk affects the entire market and cannot be eliminated through diversification. Includes interest rate changes, recessions, and geopolitic... ...read more

market risk undiversifiable risk beta macro factors

Value at Risk (VaR)

Risk

Loss threshold not exceeded with X% confidence over Y period

VaR estimates maximum potential loss over a period at a confidence level. Methods include historical simulation, parametric, and Monte Carlo. Limitati... ...read more

risk measurement loss estimation confidence interval portfolio risk