Glossary

This glossary covers the key terms, metrics, and concepts you'll encounter while using ArthaPilot's tools.

Terms are defined in the context of how ArthaPilot uses them. For authoritative definitions, consult the SEC, IRS, or a qualified financial advisor.

Core Metrics

CAGR (Compound Annual Growth Rate): The smoothed annual rate of return that turns your starting value into your ending value over a period. Formula: CAGR = (End / Start)^(1/years) - 1. A $10,000 investment that grows to $20,000 in 10 years has a CAGR of about 7.2%.
Sharpe Ratio: A measure of risk-adjusted return: how much excess return you earn per unit of volatility. Formula: Sharpe = (Return - Risk-Free Rate) / Std Dev. Higher values indicate more excess return per unit of volatility.
Sortino Ratio: Like the Sharpe Ratio, but only penalizes downside volatility (negative returns). It ignores upside swings, making it a better measure when returns are skewed.
Max Drawdown: The largest peak-to-trough decline in portfolio value, expressed as a percentage. A max drawdown of -50% means the portfolio lost half its value from its highest point before recovering.
Standard Deviation / Volatility: A measure of how spread out returns are around the average. Higher volatility means bigger swings, both up and down. Usually reported as an annualized percentage.
Alpha: The portion of a portfolio's return that can't be explained by its benchmark. Positive alpha means the strategy outperformed after adjusting for market risk.
Beta: How sensitive a portfolio is to market movements. A beta of 1.2 means the portfolio tends to move 20% more than the market in either direction.
Tracking Error: The standard deviation of the difference between a portfolio's returns and its benchmark. Lower tracking error means the portfolio more closely follows the benchmark.

Portfolio Construction

Rebalancing: The process of restoring a portfolio to its target allocation by buying or selling assets. Drift happens naturally as asset prices change.
Diversification: Spreading investments across multiple assets to reduce risk. The key insight: assets that don't move in lockstep can reduce overall portfolio volatility without sacrificing returns.
Correlation: A number from -1 to +1 measuring how two assets move together. +1 means they move in perfect sync; -1 means they move in opposite directions; 0 means no relationship.
Efficient Frontier: The set of portfolios that offer the highest expected return for each level of risk. Any portfolio below the frontier is suboptimal: you could get more return for the same risk, or less risk for the same return.
Risk Parity: An allocation strategy where each asset contributes equally to total portfolio risk (volatility), rather than being weighted equally by dollar amount. Assets with lower volatility get larger allocations.
CVaR (Conditional Value at Risk): The expected loss in the worst X% of scenarios (typically worst 5%). Also called "expected shortfall." More conservative than VaR because it considers how bad the tail losses actually are, not just the threshold.
Monte Carlo: A technique that runs thousands of random simulations to estimate the range of possible outcomes for a portfolio. Useful for retirement planning and stress-testing strategies.
Safe Withdrawal Rate (SWR): The maximum percentage of a portfolio you can withdraw annually in retirement without running out of money over a specified period. The classic "4% rule" comes from Monte Carlo-style analysis.

Signals & Technical Analysis

SMA (Simple Moving Average): The average price of an asset over the last N days. Used as a trend indicator: when the price is above its SMA, the trend is considered bullish.
RSI (Relative Strength Index): A momentum oscillator that ranges from 0 to 100. Readings above 70 suggest an asset may be overbought; below 30 suggests oversold. Used in tactical strategies to time entries and exits.
VIX: The CBOE Volatility Index, a measure of expected market volatility over the next 30 days, derived from S&P 500 option prices. Often called the "fear gauge." Higher values indicate more uncertainty.
Momentum: The rate at which an asset's price is accelerating. Momentum signals typically look at returns over the past 1-12 months and bet that recent trends will continue.
Whipsaw: When a signal triggers a trade that quickly reverses, causing a loss. For example, a moving-average crossover signal might trigger a buy, only for the price to immediately fall back below the average.
Fat Tails: The observation that extreme market events (crashes, spikes) happen more frequently than a normal distribution would predict. Real market returns have "fatter tails" than a bell curve.

Leverage

Notional Exposure: The total market value your portfolio controls, including leverage. If you invest $10,000 in a 3× ETF, your notional exposure is $30,000.
Volatility Drag: The mathematical drag on compound returns caused by volatility. Even with zero average return, a volatile asset loses value over time because losses require larger gains to recover. Formula (approximate): g ≈ μ - ½σ². Leverage amplifies this effect.
Leverage Ratio: The multiplier applied to an underlying asset's returns. A leverage ratio of 2× means you get twice the daily gain or loss of the underlying.
LETF (Leveraged ETF): An exchange-traded fund that uses derivatives (swaps, futures) to deliver a multiple of its benchmark's daily return. Examples: UPRO (3× S&P 500), TQQQ (3× Nasdaq-100), SSO (2× S&P 500).
Daily Reset: The mechanism by which leveraged ETFs reset their target leverage each day. This causes returns over periods longer than one day to diverge from a simple multiple of the benchmark, especially in choppy markets.

Tax Concepts

Marginal vs Effective Tax Rate: Your marginal rate is the tax rate on your next dollar of income (the bracket you're currently in). Your effective rate is your total tax divided by total income, always lower than the marginal rate because lower brackets apply to your initial income.
AMT (Alternative Minimum Tax): A parallel tax calculation that adds back certain deductions and preference items. You pay whichever is higher: regular tax or AMT. Most commonly triggered by ISO exercises and large SALT deductions.
ISO (Incentive Stock Option): A type of employee stock option with favorable tax treatment. The "spread" (difference between market value and strike price) at exercise is not taxed as ordinary income but is an AMT preference item.
NSO (Non-Qualified Stock Option): A stock option where the spread at exercise is taxed as ordinary income (reported on your W-2). Unlike ISOs, NSOs don't create an AMT differential.
Wash Sale: An IRS rule that disallows a tax loss if you buy a "substantially identical" security within 30 days before or after selling at a loss. The disallowed loss is added to the cost basis of the replacement shares.
Tax-Loss Harvesting: Intentionally selling losing positions to realize capital losses, which offset capital gains and reduce your tax bill. Must be done carefully to avoid wash sale rules.
Cost Basis Methods: The method used to determine which shares are sold when you sell part of a position. Common methods: FIFO (first in, first out), LIFO (last in, first out), specific identification, and average cost. The method affects the size and timing of your taxable gains.
Short-Term vs Long-Term Capital Gains: Gains on assets held less than one year are "short-term" and taxed at ordinary income rates (up to 37%). Gains on assets held longer are "long-term" and taxed at preferential rates (0%, 15%, or 20%).
SALT (State and Local Taxes): The federal deduction for state and local income, sales, and property taxes. Currently capped at $40,000 (MFJ) under the One Big Beautiful Bill Act, which limits its value in high-tax states.
Roth Conversion: Moving money from a traditional (pre-tax) IRA or 401(k) to a Roth account. The converted amount is taxed as ordinary income in the year of conversion, but future growth and withdrawals are tax-free.
NIIT (Net Investment Income Tax): An additional 3.8% tax on investment income (interest, dividends, capital gains) for individuals with modified AGI above $200,000 ($250,000 MFJ).

Other Terms

DCA (Dollar-Cost Averaging): Investing a fixed dollar amount at regular intervals (e.g., $500 per month) regardless of price. Automatically buys more shares when prices are low and fewer when high.
T-Bill (Treasury Bill): A short-term U.S. government debt security with maturities from a few days to one year. Considered risk-free. T-bill interest is exempt from state and local income taxes.
FDIC (Federal Deposit Insurance Corporation): A government agency that insures bank deposits up to $250,000 per depositor per institution. HYSA accounts are typically FDIC-insured; T-bill ETFs are not.
ATH (All-Time High): The highest price an asset has ever reached. The ATH Proximity tab in the Asset Analyzer shows how close an asset is to its ATH over time.
APY (Annual Percentage Yield): The effective annual rate of return on a deposit or investment, accounting for compound interest. A 5.0% APY means $10,000 grows to $10,500 in one year with compounding.