A

Alpha DecayThe rate at which a signal's predictive power diminishes as the forecast horizon lengthens.Read definition →Alpha SignalA quantitative predictor of future asset returns that is independent of known systematic risk factors.Read definition →Amihud Illiquidity RatioA market-level proxy for price impact per dollar traded, computed as |return| / dollar volume.Read definition →

B

Backtest OverfittingWhen in-sample optimization causes historical performance to overstate expected live performance.Read definition →Barra Risk ModelA commercial factor risk model that decomposes equity return variance into systematic factor and idiosyncratic components.Read definition →Bid-Ask SpreadThe difference between the best available ask price and the best available bid price; the minimum round-trip transaction cost.Read definition →BreadthThe number of independent investment decisions made per year; the N in the Fundamental Law of Active Management.Read definition →Brinson-Hood-Beebower (BHB) AttributionA return attribution framework that decomposes active portfolio return into allocation, selection, and interaction effects.Read definition →

C

Calmar RatioAnnualized return divided by maximum drawdown; a drawdown-adjusted performance metric.Read definition →Carry SignalThe expected return of holding a high-yielding asset funded by a low-yielding one, absent price changes.Read definition →Cross-Sectional AlphaAlpha measured by comparing returns across a universe of assets at a given point in time, rather than a single asset's time-series history.Read definition →

D

Deflated Sharpe Ratio (DSR)A Sharpe Ratio adjusted for multiple testing, non-normality, and the number of trials; produces a probability that the true SR is positive.Read definition →

E

Ensemble MethodsTechniques that combine predictions from multiple models to reduce variance and improve out-of-sample robustness.Read definition →

F

Factor AttributionDecomposing portfolio returns into contributions from systematic risk factors versus idiosyncratic (signal-specific) performance.Read definition →Fama-French FactorsA family of systematic return factors — starting with market, size (SMB), and value (HML) — that explain cross-sectional equity returns beyond CAPM.Read definition →Feature ImportanceA measure of each input variable's contribution to a machine learning model's predictions.Read definition →Fractional KellyBetting a fraction of the Kelly-optimal position size, trading some expected growth for lower variance and smaller drawdowns.Read definition →Fundamental Law of Active ManagementGrinold & Kahn's formula: IR ≈ IC × TC × √N, linking Information Ratio to signal skill, transfer coefficient, and breadth.Read definition →

H

Hidden Markov Model (HMM)A probabilistic model where an observed sequence is generated by an unobserved latent state that transitions according to a Markov process.Read definition →Hit RateThe fraction of trades or bets that are profitable; a simple measure of directional accuracy.Read definition →

I

In-Sample vs Out-of-SampleIn-sample (IS): performance on data used during development. Out-of-sample (OOS): performance on held-out data never touched during development.Read definition →Information Coefficient (IC)The correlation between a signal's forecasts and subsequent realized returns; the foundational measure of signal predictive skill.Read definition →Information Ratio (IR)Annualized active return divided by tracking error; measures the consistency of alpha generation relative to a benchmark.Read definition →

K

Kelly CriterionA formula for optimal bet sizing that maximizes the expected long-run growth rate of a portfolio.Read definition →Kyle's Lambda (λ)The price impact coefficient from Kyle (1985): the sensitivity of price changes to signed order flow.Read definition →

M

Market ImpactThe price movement caused by a trade's own execution, comprising permanent (informational) and temporary (mechanical) components.Read definition →Maximum DrawdownThe largest peak-to-trough decline in a portfolio's value over a given period.Read definition →Mean ReversionThe tendency of prices or spreads to return toward a long-run average following a deviation.Read definition →Minimum Track Record LengthThe minimum number of return observations needed to conclude, with statistical confidence, that a strategy's true Sharpe Ratio is positive.Read definition →Momentum SignalA signal based on the tendency of assets that have outperformed over a past lookback window to continue outperforming in the near term.Read definition →Multiple TestingWhen many strategy variants are evaluated and the best selected, the probability of false discovery rises sharply, inflating backtested Sharpe Ratios.Read definition →

O

Order Flow Imbalance (OFI)Net signed order flow at the best bid and ask, shown to predict short-term price moves in equity markets.Read definition →

P

Probability of Backtest Overfitting (PBO)The estimated probability that the best in-sample strategy will underperform the median out-of-sample, using combinatorial cross-validation.Read definition →Purged Cross-ValidationCross-validation for financial time series that removes observations adjacent to the test set from training, eliminating leakage from autocorrelation.Read definition →

R

Regime DetectionIdentifying distinct, persistent market states within which signal behavior, volatility, or return dynamics differ meaningfully.Read definition →Returns-Based Style Analysis (RBSA)Inferring a portfolio's factor exposures by regressing its returns on passive factor indices, without requiring holdings data.Read definition →Risk-On / Risk-Off (RORO)A macro market regime defined by investor risk appetite, where correlated asset moves reflect a shared flight to or from risk.Read definition →Roll Spread EstimatorA transaction-cost estimator that infers the effective bid-ask spread from the serial covariance of price changes.Read definition →Rolling ICThe Information Coefficient computed over a rolling time window, used to track signal decay, stability, and regime-conditional behavior.Read definition →

S

Sharpe RatioAnnualized excess return divided by annualized standard deviation; the most widely used risk-adjusted performance metric.Read definition →Signal AggregationCombining multiple alpha signals into a single composite forecast to improve stability and reduce reliance on any one signal.Read definition →Signal Half-LifeThe forecast horizon at which a signal's Information Coefficient has decayed to half its peak value.Read definition →SlippageThe difference between the expected execution price and the actual price realized, including market impact and timing delays.Read definition →Sortino RatioExcess return divided by downside deviation; measures return per unit of downside risk rather than total volatility.Read definition →

T

Transfer Coefficient (TC)The correlation between unconstrained optimal weights and actual implemented weights; measures how fully a signal is expressed in the portfolio.Read definition →Treynor RatioExcess return per unit of systematic (market) risk, expressed as beta rather than total volatility.Read definition →TurnoverThe fraction of portfolio value traded per period; the key link between gross alpha and net alpha after transaction costs.Read definition →

V

Value SignalA signal that buys assets cheap relative to a fundamental measure and sells expensive ones; one of the most documented cross-asset return premia.Read definition →VPIN (Volume-Synchronized Probability of Informed Trading)A measure of order-flow toxicity — the estimated probability that trading volume is driven by informed agents rather than noise traders.Read definition →

W

Walk-Forward AnalysisA sequential backtesting method: fit on a training window, test on the next period, roll forward — simulating live deployment.Read definition →