BacktestFolio · Glossary
Terms you encounter in BacktestFolio explained clearly: returns, risk, correlations, withdrawals and more.
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3- BacktestIt is like testing a strategy back in time: take the assets you want to hold today and see how they would have returned over th…
- BenchmarkIt is the 'rival' against which you compare your portfolio — usually a market index such as the S&P 500 or a 60/40 portfolio. I…
- BetaIf the market rises 10% and your portfolio rises 15%, Beta is roughly 1.5. If it loses 8% when the market loses 10%, Beta is ro…
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5- CAGRIf your portfolio grew from 100 to 150 in 5 years, the CAGR tells you by what percentage it grew each year on a geometric-avera…
- CalmarIf a portfolio has a CAGR of 6% and a maximum drawdown of -30%, the Calmar ratio is 0.20. Comparing Calmar across portfolios he…
- CorrelationRanges from -1 to +1. Near +1 the two assets always move in the same direction; near -1 they move in opposite directions. Low c…
- CPIThe CPI is the thermometer of inflation: if it rises 3% in a year, the same basket of goods costs 3% more. In BacktestFolio, CP…
- CVaR (95%)Answers the question: 'In the worst 5% of scenarios, how much do I lose on average?' It is more informative than VaR because it…
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7- DCAInvesting a fixed amount each month rather than all at once. During downturns you buy more units, lowering the average cost — t…
- DecumulationAfter years of contributions comes the moment of withdrawal — this is the decumulation phase. The challenges change completely:…
- DiversificationDon't put all your eggs in one basket: if equities and bonds don't always fall together, a mixed portfolio weathers crashes bet…
- Diversification RatioIf the weighted average of your asset volatilities is 15% but the portfolio volatility is 10%, the Diversification Ratio is 1.5…
- Downside CaptureIf in negative benchmark months your portfolio loses on average only 60% of what the benchmark loses, the Downside Capture is 6…
- Downside DeviationLike regular volatility, but ignores upward moves — it only counts losses and disappointing returns. A portfolio with high tota…
- DrawdownMeasures how far the portfolio has fallen from its previous peak. A drawdown of -30% means the value dropped by one third from…
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3- Efficient FrontierFor every level of risk you are willing to accept, there is an optimal combination of assets that gives the maximum possible re…
- Equity CurveThis is the chart showing how the value of your portfolio would have grown (or fallen) over the analysed period, accounting for…
- ERCInstead of dividing capital equally, ERC divides risk equally. More volatile assets receive a lower weight so they do not domin…
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3- GARCHMarkets are never equally volatile: after a crash, the following days and weeks tend to be turbulent too; in calm markets, calm…
- GlidepathInstead of always holding the same percentage of equities, a glidepath automatically adjusts the allocation over time. Target D…
- Guyton-KlingerInstead of always withdrawing the same inflation-adjusted amount (fixed SWR), Guyton-Klinger adjusts withdrawals year by year b…
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4- Pairwise AnalysisImagine a round-robin tournament: every portfolio plays against every other on each historical sub-period. The matrix tells you…
- PercentileIf the P10 of portfolio value at 20 years is €180,000, it means that in the 10% worst scenarios you would end up with less than…
- Projection ConeThe cone shows that the further you look into the future, the greater the uncertainty: bands widen because small return differe…
- PWRWith PWR you withdraw only the 'returns' without touching the capital: at the end of the horizon you still have the same wealth…
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7- Real InflationA nominal return of +5% with 3% inflation is worth only +2% in real terms. Withdrawal analyses (SWR/PWR) use real returns to as…
- RebalancingIf an asset grows sharply and exceeds its target weight, the excess is sold to buy underweight assets. This maintains the origi…
- Recovery FactorIf the portfolio gained 150% in total but had a maximum drawdown of -30%, the Recovery Factor is 5. The higher it is, the bette…
- Recovery TimeAfter the 2008 crash, many equity portfolios took years to recover their previous value. Knowing how long it takes to get back…
- Risk ContributionAn asset may represent 10% of the portfolio but contribute 25% of the risk if it is highly volatile or correlated with the othe…
- Risk-freeThe return you would earn on a 'risk-free' investment (typically short-term government bonds). Sharpe and Sortino measure how m…
- Rolling ReturnsInstead of just looking at 'from 2000 to today', rolling returns show all 5-year (or 3-year, or 10-year) periods contained in t…
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7- Sequence RiskTwo people with the same portfolio and the same withdrawal rate can have completely different outcomes: whoever retires just be…
- SharpeAnswers: 'For every unit of risk taken, how much extra performance did I earn compared with taking no risk?' A Sharpe above 1 i…
- SortinoLike the Sharpe, but penalises only downward oscillations: positive fluctuations do not lower the score. More useful than Sharp…
- Stationary BootstrapInstead of shuffling each individual month at random, Bootstrap samples consecutive sequences of history: if a month was part o…
- Success RateIf in 920 out of 1,000 historical scenarios the portfolio does not run out before the chosen duration, the success rate is 92%.…
- Survivorship BiasAnalysing active funds over the last 20 years? You are only seeing the ones that still exist today. Those closed because they p…
- SWRThe percentage of wealth you can withdraw each year without risking running out of money within the chosen horizon. The well-kn…
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6- TERThe annual management cost of ETFs or funds in the portfolio, expressed as a percentage of assets. A TER of 0.20% means 2 euros…
- Time HorizonThe number of years considered radically changes the conclusions: an equity portfolio may look risky over 5 years but very robu…
- Tracking ErrorIf your portfolio gains +12% when the benchmark gains +10%, and next year +8% when the benchmark does +11%, Tracking Error capt…
- TreynorLike the Sharpe, but divides by Beta instead of volatility: useful for comparing well-diversified portfolios where idiosyncrati…
- Trinity StudyThe origin of the 4% rule: the study showed that, over 30 years, an annual withdrawal of 4% of initial capital has historically…
- TWRRMeasures the 'pure' performance of the portfolio regardless of when and how much you invested. It is the industry standard for…
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3- VaR (95%)Answers: 'Under normal market conditions, what is the maximum loss over this horizon in 95% of cases?' If the 1-year VaR is -15…
- VolatilityMeasures how much returns fluctuate over time. High volatility means sharp rises and falls; low volatility indicates a smoother…
- VPWWith VPW you always withdraw a percentage of what you have today — not of what you started with. If markets fall, you withdraw…