# Key Concepts

## Glossary

### alpha

The quantity of an algorithm's returns that aren't explained by its underlying benchmark.

### annual standard deviation

A staticial measure that describes the dispersion of annual returns relative to the mean annual return. It's the square root of the annual variance.

### annual variance

A staticial measure that describes the dispersion of annual returns relative to the mean annual return.

### average loss

The average rate of return for unprofitable trades.

### average win

The average rate of return for profitable trades.

### beta

The scale and direction of an algorithm's returns relative to movements in the underlying benchmark.

### capacity

The maximum amount of money an algorithm can trade before its performance degrades from market impact.

### compounding annual return

The annual percentage return that would be required to grow a portfolio from its starting value to its ending value.

### drawdown

The largest peak to trough decline in an algorithm's equity curve.

### equity

The total portfolio value if all of the holdings were sold at current market rates.

### holdings

The absolute sum of the items in the portfolio.

### information ratio

The amount of excess return from the risk-free rate per unit of systematic risk.

### intrinsic value

(Call Option) The price of an asset minus the strike price if the price is above the strike price, otherwise zero.

(Put Option) The strike price minus the price of an asset if the price is below the strike price, otherwise zero.

The practice of making decisions using information that would not be available until some time in the future.

### loss rate

The proportion of trades that were not profitable.

### lowest capacity asset

The asset an algorithm traded that has the lowest capacity.

### net profit

(Percent) The rate of return across the entire trading period.

(Dollar-value) The dollar-value return across the entire trading period.

### out-of-the-money amount

(Call Option) The strike price minus the price of an asset if the price is below the strike price, otherwise zero.

(Put Option) The price of an asset minus the strike price if the price is above the strike price, otherwise zero.

### payoff

The profit or loss that an Option buyer or seller makes from a trade.

A trader who executes four or more day trades in the US Equity market within five business days.

### Probabilistic Sharpe ratio

The probability that the estimated Sharpe ratio of an algorithm is greater than a benchmark (1).

### profit-loss ratio

The ratio of the average win rate to the average loss rate.

### return

The rate of return across the entire trading period.

### Sharpe ratio

A measure of the risk-adjusted return, developed by William Sharpe.

### total fees

The total quantity of fees paid for all the transactions.

### total net profit

The rate of return across the entire trading period.

The number of orders that were filled or partially filled.

### tracking error

A measure of how closely a portfolio follows the index to which it is benchmarked. A tracking error of 0 is a perfect match.

### Treynor ratio

A measurement of the returns earned in an algorithm in excess of the risk-free rate per unit of benchmark risk, developed by Jack Treynor.

### unrealized

The amount of profit a portfolio would capture if it liquidated all open positions and paid the fees for transacting and crossing the spread.

### volume

The total value of assets traded for all of an algorithm's transactions.

### win rate

The proportion of trades that were profitable after transaction fees.

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