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What Is the Treynor Ratio? The Treynor Ratio measures how much return an investment generates per unit of market risk. More specifically, it evaluates returns relative to systematic risk, which is the risk you cannot diversify away—the risk of the overall market. This is measured using beta. Here’s the simple idea: How much reward did I get for the market risk I took? The formula looks like this: Treynor Ratio = (Portfolio Return – Risk-Free Rate) ÷ Beta

What Is the Sortino Ratio? The Sortino Ratio is a performance metric that measures an investment’s return relative to its downside risk. In plain English: It tells you how much return you’re getting for the bad volatility, not all volatility. That’s an important distinction. Most traditional risk metrics treat all ups and downs as risk. But let’s be honest—most investors don’t lose sleep over their portfolio going up. They worry about losses.

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What Is the Sharpe Ratio? The Sharpe Ratio measures how much return an investment generates relative to the risk taken to earn it. In plain English: It tells you whether your investment’s performance is due to skill or just roller-coaster volatility. The basic idea is this: Higher Sharpe Ratio = better risk-adjusted return Two investments might earn the same return, but the one with a higher Sharpe Ratio did it with less turbulence along the way.

What Is Risk Budgeting? Risk Budgeting is the process of intentionally deciding how much investment risk you’re willing—and able—to take, and then allocating that risk across your portfolio in a disciplined way. In plain English: It’s not just what you invest in—it’s how much volatility, uncertainty, and downside exposure you allow each investment to have. Instead of saying, “I’ll put 60% in stocks and 40% in bonds and hope for the best,” risk budgeting asks a smarter ques

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Definition of Risk Parity Risk Parity is an investment strategy that builds a portfolio by balancing risk, not just dollars. Instead of allocating money based on how much you invest in each asset, risk parity focuses on how much volatility each asset contributes to the overall portfolio. In plain English: it’s not about how much money you put in—it’s about how much stress each investment puts on your portfolio.

Definition of Relative Strength Relative Strength is a way to compare the performance of one investment to another—most commonly against the overall market or a benchmark like the S&P 500. Instead of asking, “Is this investment going up?” relative strength asks the better question: “Is this investment performing better or worse than something else?” That subtle shift matters more than most people realize. An investment can be rising in price and still be a poor performer..

What Is the Endowment Effect? The Endowment Effect is a behavioral finance bias where people place a higher value on something simply because they own it. In plain English: Ownership makes us emotionally attached, and that attachment inflates value in our minds. Once something becomes “mine,” logic quietly leaves the room and emotion takes the driver’s seat.

What Prospect Theory Means (Plain English Version) Prospect Theory explains why people make decisions based on how choices are framed—especially when facing gains and losses. In short: - We hate losing more than we like winning. - We’re risk-averse with gains but weirdly risk-seeking with losses. - Our emotions often override the math.

Definition of Modern Portfolio Theory (MPT) Modern Portfolio Theory is the idea that you can improve your investment results not by picking perfect individual stocks, but by building a blend of different investments that work well together. The goal? Maximize your return while minimizing your risk. In other words: Don’t bet the farm on one horse. Build a team where each player brings something different to the field.

What Is Asset Allocation? Asset allocation is the strategy of dividing your investments across different “buckets” — typically stocks, bonds, and cash — based on your goals, your time horizon, and how much risk you can stomach without losing sleep or stress-eating Chips Ahoy at midnight. Think of it like building a balanced meal. Stocks = protein Bonds = veggies Cash = carbs

Definition of Buy and Hold Buy and Hold is a long-term investment strategy where an investor purchases assets—typically stocks, ETFs, or index funds—and holds them for an extended period, regardless of market fluctuations. The idea is simple: time in the market beats timing the market. Instead of jumping in and out based on daily trends or short-term news, the buy-and-hold investor focuses on the long-term growth of their investments.

Definition of Momentum Investing Momentum investing is an investment strategy where investors buy assets that have shown strong recent performance and sell those that have shown weak performance. It’s based on the idea that rising stocks often keep rising for a time, and falling stocks often keep falling, because of market psychology and herd behavior.

Definition of Income Investing Income investing is a strategy focused on generating steady, reliable income from your investments—usually through dividends, interest, or rental income. Instead of betting on stock prices shooting up over time, income investors look for assets that pay them regularly. The goal? To build a portfolio that produces consistent cash flow without needing to sell assets to make money.

Definition of Common Stock Common stock represents ownership in a company. When you buy common stock, you’re essentially buying a small slice of that business. As a shareholder, you’re entitled to a portion of the company’s profits (usually in the form of dividends if paid), and you have voting rights to help elect the board of directors or vote on major company decisions. Think of common stock as your seat at the table—albeit maybe at the back if you only own a few shares.

What is Preferred Stock? Preferred stock is a type of ownership in a company that has a higher claim on assets and earnings than common stock. That means if the company pays dividends, preferred shareholders get theirs first. If the company goes belly-up (let’s hope not), preferred shareholders also get paid before common stockholders—though still after bondholders.

Definition of Value Stock A value stock is a share of a company that appears to be trading for less than its intrinsic value. Think of it as a great company that’s momentarily on the clearance rack. Investors believe the stock is undervalued by the market and has solid fundamentals—like steady earnings, a strong balance sheet, and even dividends—but for whatever reason, Wall Street’s spotlight isn’t on it… yet.

Definition of Growth Stock A growth stock is a publicly traded company that is expected to grow at a rate significantly above the average for the overall market. These are the kinds of companies reinvesting their earnings back into the business instead of paying dividends, with the goal of expanding fast—think rocket fuel, not steady cruise.

Definition of Penny Stock A penny stock is typically a share of a small public company that trades for less than $5 per share. These stocks are often traded over-the-counter (OTC) through platforms like the OTC Bulletin Board or Pink Sheets, rather than on major exchanges like the NYSE or Nasdaq. Penny stocks are known for their low price, low trading volume, and high risk—but also the potential for high reward.