← Back to Documentation

Glossary

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

Core Metrics

  • CAGR (Compound Annual Growth Rate): The smoothed annual return that turns a starting value into the ending value over a period. $10,000 growing to $20,000 in 10 years is a CAGR of about 7.2%. Formula: CAGR = (End / Start)^(1/years) - 1.
  • Sharpe Ratio: Risk-adjusted return: excess return per unit of volatility. Higher is better, compared over the same period and risk-free-rate assumption. A Sharpe of 0.8 means each unit of volatility delivered 0.8 units of excess return.
  • Sortino Ratio: Like the Sharpe Ratio, but only penalizes downside volatility. Better when returns are skewed. A strategy with large upside swings but small drawdowns will have a higher Sortino than Sharpe.
  • Calmar Ratio: Annualized return divided by the size of the worst peak-to-trough decline. It rewards strategies that grow without deep crashes. A 10% CAGR with a -20% max drawdown gives a Calmar of 0.5.
  • Ulcer Index: Measures how deep and how long drawdowns were over a period. Unlike max drawdown, it counts time spent underwater, not just the single worst dip.
  • UPI (Ulcer Performance Index): Excess return divided by the Ulcer Index. Like the Sharpe Ratio, but it penalizes deep, long drawdowns instead of day-to-day volatility.
  • Omega Ratio: The ratio of gains above a chosen threshold to losses below it, using the entire return distribution. A value above 1 means gains outweighed losses at that threshold.
  • 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: How spread out returns are around their average. Higher volatility means bigger swings in both directions. Usually annualized. 15% annualized volatility means roughly +/-15% swings per year.
  • Alpha: The portion of a portfolio's historical return not explained by the selected benchmark or factor model. It is model-specific and does not prove skill. An alpha of 2% means the portfolio earned 2% per year beyond what its factor bets would predict.
  • Beta: How sensitive a portfolio is to market movements. A beta of 1.2 means the portfolio moves about 20% more than the market. Beta of 0.5: if the market drops 10%, the portfolio tends to drop about 5%.
  • Tracking Error: The standard deviation of the difference between a portfolio's returns and its benchmark. Lower tracking error means the portfolio follows the benchmark more closely.
  • R-squared: The fraction of a portfolio's return variation explained by the factor model. Ranges from 0 to 1. R-squared of 0.95 means 95% of the portfolio's behavior is explained by the selected factors.
  • F-statistic: Tests whether the factor model as a whole explains meaningful variation. A large F with small p-value means yes.
  • P-value: The probability of seeing a result this extreme if the true effect were zero. Smaller p-values indicate stronger evidence. p < 0.05 is the conventional threshold for statistical significance.
  • Confidence Interval: A range of values likely to contain the true parameter. A 95% CI means that in repeated samples, 95% of such intervals would contain the true value.

Portfolio Construction

  • Rebalancing: Restoring a portfolio to its target allocation by buying or selling assets after prices drift. If your 60/40 portfolio drifts to 70/30 after a rally, rebalancing sells stocks and buys bonds to return to 60/40.
  • Drift: How far an asset's current weight has moved away from its target weight as prices change. Rebalancing rules and drift alerts both key off this gap. A 60% stock target that has grown to 66% of the portfolio has drifted by 6 percentage points.
  • Turnover: How much of the portfolio is bought and sold over a period. Higher turnover means more trading, which raises transaction costs and, in taxable accounts, realized gains.
  • Diversification: Spreading investments across assets that don't move in lockstep to reduce overall risk.
  • Correlation: A number from -1 to +1 measuring how two assets move together. +1 is perfect sync, -1 is opposite, 0 is unrelated. Stocks and bonds often have low or negative correlation, which is why they pair well in portfolios.
  • Efficient Frontier: The set of portfolios offering the highest expected return for each level of modeled risk under the selected inputs. If Portfolio A has the same return as B but lower volatility, B is below the frontier.
  • Risk Parity: An allocation strategy where each asset contributes equally to total portfolio risk, rather than being weighted by dollar amount. Bonds get a larger dollar allocation than stocks because their volatility is lower.
  • CVaR (Conditional Value at Risk): The expected loss in the worst X% of scenarios (typically worst 5%). Also called expected shortfall. A CVaR 95% of -12% means that in the worst 5% of outcomes, the average loss is 12%.
  • Monte Carlo: Randomized market paths used to estimate how a plan might behave under different return sequences. The output is a distribution, not a forecast. Running 10,000 simulations shows the 10th-percentile outcome alongside the median, giving a sense of downside risk.
  • Asset Location: Choosing which account type (taxable, traditional, Roth) holds each asset, separate from how much of each asset to own. Placing tax-inefficient assets in tax-advantaged accounts reduces tax drag. Holding bonds in an IRA and broad stock funds in taxable is the classic asset-location pattern.

ArthaPilot Workflow Terms

  • Backtest: A historical replay on observed market data. Backtests answer what happened under the selected dates, prices, cash flows, rebalance rules, and tax assumptions.
  • Simulation: A modeled path that may be historical, randomized, or rule-generated. Monte Carlo simulations use randomized paths rather than one observed historical sequence.
  • Scenario: One configured set of assumptions inside a tool. Changing the date range, tax profile, cash flows, or rebalance rule creates a different scenario.
  • Strategy: A repeatable allocation or rule-based approach. A strategy can be a fixed allocation, a signal-driven rule set, or a reusable Library item.
  • Portfolio: The holdings, allocations, or sleeves being modeled. A portfolio can contain one static allocation or multiple strategy sleeves.
  • Account: The ownership and tax wrapper for assets, such as taxable, IRA, Roth, HSA, or 401(k). Account type affects tax treatment, withdrawal rules, and some planning constraints.
  • Analysis: A saved, reopenable snapshot of one tool result, including its inputs and enough metadata to reproduce it later. Analyses live in Workspace.
  • Library Item: A reusable object (portfolio, strategy, signal, or preset) that can be loaded into any compatible tool from Workspace.
  • Tax Drag: The reduction in returns caused by realized taxable gains, taxable income, and tax timing. ArthaPilot reports tax drag when the selected workflow can compare pre-tax and after-tax paths.

Signals & Technical Analysis

  • SMA (Simple Moving Average): The average price over the last N days, used as a trend indicator. When price crosses above its 200-day SMA, the trend is considered bullish.
  • RSI (Relative Strength Index): A momentum oscillator from 0-100. Above 70 may be overbought, below 30 oversold.
  • VIX: The CBOE Volatility Index. Measures expected market volatility over the next 30 days from S&P 500 option prices. A VIX of 12 signals calm markets; above 30 signals significant fear. Often called the "fear gauge."
  • Momentum: The rate at which an asset's price is accelerating. Momentum strategies bet that recent trends will continue. 12-month momentum: if a stock is up 20% over the past year, it has positive momentum.
  • Whipsaw: When a signal triggers a trade that quickly reverses, causing a loss from the false signal. A moving-average crossover triggers a buy, but the price immediately falls back below the average.
  • Fat Tails: The observation that extreme market events (crashes, spikes) happen more often than a normal distribution would predict.

Tactical And Ranked Allocation

  • Allocation Rule: A named asset mix that becomes active when its signal is true. In Strategy Builder, rules are checked top to bottom and the first rule whose signal is true wins.
  • Fallback Rule: The last allocation rule in a strategy, used when no earlier rule's signal fires. Has no signal condition.
  • Ranked Allocation: An allocation rule that picks tickers dynamically by scoring a universe on a chosen metric and holding the top or bottom N.
  • Universe: The set of candidate tickers a ranked rule chooses from. In Strategy Builder the universe holds 2 to 29 plain tickers; ticker expressions and bond modifiers are not allowed.
  • Fallback Ticker: The single ticker a ranked rule holds 100% when zero universe tickers pass filtering (for example when an absolute-momentum threshold knocks everything out). Typically a short-term Treasury or cash proxy.
  • Fixed Sleeve: A portion of a ranked allocation rule pinned to a fixed ticker and weight. The ranked selection runs on the remaining weight, so a core holding can stay constant while the rest rotates.
  • Rerank Cadence: How often a ranked rule recomputes its selection. Between reranks the selection is forward-filled. With monthly trading frequency a ranked rule reranks every 21 trading rows; quarterly reranks every 63.
  • 13612W Weighting: Per-lookback weights of 12/4/2/1 applied to 1-, 3-, 6-, and 12-month momentum scores, as used by VAA, BAA, and HAA. Lookbacks are combined with these weights instead of simple averaging.
  • Breadth Gate: A composite signal that is true only when every ticker in a set has positive momentum. Used by BAA and HAA to switch between offensive and defensive ranked universes.
  • Inverse-Volatility Weighting: Weighting selected tickers proportional to 1 / annualized volatility, so lower-volatility tickers get larger allocations. Falls back to equal weighting when any selected ticker has zero or missing volatility.

Leverage

  • Notional Exposure: The total market value a portfolio controls, including leverage. Investing $10,000 in a 3x ETF gives a notional exposure of $30,000.
  • Volatility Drag: Mathematical drag on compound returns caused by volatility. Leverage amplifies this effect quadratically. A 3x leveraged fund in a flat but volatile market underperforms because drag scales with L-squared times variance.
  • Volatility Decay: Structural drag on daily-reset leveraged products that grows with the square of leverage times variance. Even with zero financing and fees, a 3x LETF in a choppy sideways market underperforms its 3x arithmetic reference.
  • Leverage Ratio: The multiplier applied to an underlying asset's returns. 2x means twice the daily gain or loss.
  • LETF (Leveraged ETF): Leveraged ETF. An exchange-traded fund using derivatives to deliver a multiple of its benchmark's daily return. UPRO (3x S&P 500), TQQQ (3x Nasdaq-100), SSO (2x S&P 500).
  • Daily Reset: Leveraged ETFs reset their target leverage each day, causing multi-day returns to diverge from a simple multiple of the benchmark.
  • Financing Rate: The interest rate charged on borrowed notional inside a leveraged position or ETF. The app's composite series stitches broker-call money, Fed Funds, and SOFR so long histories remain consistent. Daily financing drag is (L - 1) x rate.
  • Financing Spread: The basis-point premium dealers charge above the risk-free financing rate for the swap or margin loan that implements the leverage. Modeled as a flat value, a rate-dependent curve, or a fund-specific schedule.
  • Kelly Criterion: A formula for the bet size (or leverage level) that maximizes long-run compound growth. The resulting size is the Kelly fraction; betting beyond it lowers growth and raises the chance of deep losses.
  • k* (Growth-Optimal Leverage): The leverage multiple that historically maximized compound growth for an asset under the modeled cost assumptions. Above k*, extra leverage adds volatility drag faster than it adds return.

Factor Models

  • Fama-French Factors: A family of asset pricing models that explain returns using market, size, value, profitability, and investment factors. FF3 uses market, SMB (size), and HML (value). FF5 adds profitability and investment.
  • SMB (Small Minus Big): The Fama-French size factor: return spread between small-cap and large-cap stocks. Positive SMB beta means the portfolio tilts toward smaller companies.
  • HML (High Minus Low): The Fama-French value factor: return spread between high book-to-market and low book-to-market stocks. Negative HML beta means the portfolio behaves more like growth stocks.
  • Market Beta: The sensitivity of a portfolio to the broad equity market factor. A beta of 1 means the portfolio moves with the market.
  • Excess Returns: Portfolio returns minus the risk-free rate. Used in factor regressions to isolate risk premia from the baseline rate.

Tax Concepts

  • Marginal vs Effective Tax Rate: The marginal rate is the tax on your next dollar of income (your current bracket). The effective rate is total tax divided by total income, always lower because earlier dollars were taxed in lower brackets. Someone in the 24% bracket might have a 16% effective rate because the first dollars were taxed at 10% and 12%.
  • AGI (Adjusted Gross Income): Total income minus specific deductions, before the standard or itemized deduction. The Form 1040 line many other tax calculations start from.
  • MAGI (Modified Adjusted Gross Income): AGI with certain items added back. Different rules use different MAGI definitions: NIIT, IRMAA, and ACA subsidies each compute their own version. For ACA purposes, MAGI adds back nontaxable Social Security; for NIIT it adds back foreign earned income exclusions.
  • Filing Status (MFJ, MFS, HoH): The IRS category that sets your brackets and thresholds: single, married filing jointly (MFJ), married filing separately (MFS), or head of household (HoH).
  • AMT (Alternative Minimum Tax): A parallel tax calculation that adds back certain deductions. You pay whichever is higher: regular tax or AMT. Most commonly triggered by ISO exercises and large SALT deductions.
  • ISO (Incentive Stock Option): Incentive Stock Option. The spread at exercise isn't taxed as ordinary income but is an AMT preference item. Exercising ISOs with a $40k spread adds $40k to your AMT income, even though regular tax ignores it.
  • NSO (Non-Qualified Stock Option): Non-Qualified Stock Option. The spread at exercise is taxed as ordinary income on your W-2.
  • Wash Sale: IRS rule disallowing a tax loss if you buy substantially identical securities within 30 days before or after the sale. Sell VTI at a loss, then buy VTI again within 30 days: the loss is disallowed and added to the new cost basis.
  • Tax-Loss Harvesting: Intentionally selling losing positions to realize losses that can offset gains under IRS rules. Wash-sale rules can defer the benefit. Sell a position that's down $5,000 to offset $5,000 of capital gains elsewhere.
  • Tax Lot: One purchase of shares tracked as a unit: its date, share count, and price paid. Gains, losses, and holding periods are computed per lot when shares are sold.
  • Cost Basis: What you paid for an investment, including adjustments such as reinvested dividends. Your taxable gain or loss is the sale price minus the cost basis.
  • Cost Basis Method: The rule for deciding which shares are sold when you sell part of a position: FIFO, LIFO, specific identification, or average cost. The method affects the size and timing of taxable gains.
  • Short-Term vs Long-Term Capital Gains: Gains on assets held one year or less are short-term and taxed at ordinary income rates. Gains on assets held longer are long-term and taxed at preferential rates (0%, 15%, or 20%).
  • Qualified vs Ordinary Dividends: Qualified dividends meet IRS holding-period rules and are taxed at the lower long-term capital gains rates. Ordinary (non-qualified) dividends are taxed at regular income rates.
  • SALT (State and Local Taxes): The federal deduction for state and local income, sales, and property taxes. Currently capped at $40,000 (MFJ), which limits its value in high-tax states.
  • Roth Conversion: Moving money from a pre-tax retirement account to Roth. The converted amount is generally taxed as ordinary income in the conversion year. Converting $50k from a traditional IRA adds $50k to this year's taxable income, but the money grows tax-free from then on.
  • NIIT (Net Investment Income Tax): Net Investment Income Tax. An additional 3.8% tax on investment income for individuals above $200k MAGI ($250k MFJ). If your MAGI is $300k (MFJ), the 3.8% applies to the lesser of your investment income or the $50k over the threshold.
  • IRMAA: Income-Related Monthly Adjustment Amount. A Medicare premium surcharge based on modified AGI from two years earlier. High income in 2024 increases your Medicare premiums in 2026. Roth conversions can trigger this.

Retirement & Planning

  • Safe Withdrawal Rate (SWR): The highest annual withdrawal percentage that survived the modeled period and rules. Historical SWR is sample-specific. The classic "4% rule" means withdrawing 4% of the starting balance per year, adjusted for inflation.
  • PWR (Perpetual Withdrawal Rate): The withdrawal rate that would have preserved the portfolio's inflation-adjusted starting value over the modeled period, not just avoided running out. Always at or below the safe withdrawal rate.
  • Sequence Risk: The risk that poor returns early in retirement permanently impair a portfolio, even if average returns are adequate. Two retirees with the same average return but different sequences can have very different outcomes.
  • Survival Curve: Cumulative share of simulated paths still solvent over time. Shows depletion timing instead of compressing it to one number.
  • RMD (Required Minimum Distribution): The minimum amount the IRS requires you to withdraw from pre-tax retirement accounts each year once you reach the required age. Missing an RMD triggers an excise tax on the shortfall.
  • Roth 5-Year Clock: Each Roth conversion starts a five-year waiting period before that converted amount can be withdrawn penalty-free (before age 59 1/2). Planning tools track these clocks per conversion year.
  • Glidepath: A planned shift in allocation over time, such as moving from stock-heavy to bond-heavy as retirement approaches. Target-date funds follow a glidepath automatically.
  • ACA Premium Tax Credit (PTC): The subsidy that lowers health-insurance premiums for marketplace (ACA) plans, based on household income relative to the federal poverty level. Crossing an income threshold can shrink or eliminate the credit, a drop often called the subsidy cliff.
  • FPL (Federal Poverty Level): The government income benchmark, scaled by household size, that ACA subsidies and other programs measure income against. ACA thresholds are expressed as percentages of FPL.
  • SLCSP (Second-Lowest-Cost Silver Plan): The marketplace benchmark plan used to compute ACA premium tax credits. Your subsidy is the SLCSP premium minus your expected contribution, regardless of which plan you actually pick.
  • Real vs Nominal Dollars: Nominal dollars are face amounts with inflation left in; real dollars are adjusted to today's purchasing power. Long-horizon plans usually report real dollars so amounts stay comparable across decades.

Other Terms

  • DCA (Dollar-Cost Averaging): Dollar-Cost Averaging. Investing a fixed dollar amount at regular intervals regardless of price. Investing $500/month buys more shares when prices are low and fewer when high.
  • Basis Point (bps): One hundredth of a percentage point. Fees, spreads, and drag are often quoted in basis points. 25 bps = 0.25%.
  • T-Bill (Treasury Bill): Treasury Bill. A short-term U.S. government debt security, considered risk-free. Exempt from state/local income taxes.
  • Risk-Free Rate: The return on a theoretically riskless investment, usually proxied by short-term Treasury bills.
  • 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.