Finance and statistical definitions important to understanding Alkemy's application and API
What is the Benchmark?
For illustration purposes only, the S&P 500 is used as the benchmark. Ratios such as Beta, R-Squared are always calculated next to a benchmark. If you require a custom benchmark for your strategy, please send a request to [email protected]
What is the risk-free rate?
The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time. It can be calculated by subtracting the current inflation rate from the yield of the Treasury bond matching your investment duration. For illustration purposes, the risk-free rate used in all of our calculations is 5%.
List of Asset Classes
Refers to one of equities, bonds, commodities, foreign exchange (forex), or cryptocurrency. A strategy can invest in multiple asset classes.
List of industries
Refers to strategies that invest in securities that operate in the following industries: Technology, Telecommunications, Health Care, Financials, Real Estate, Consumer Discretionary, Consumer Staples, Industrials, Basic Materials, Energy, Utilities.
Risk levels and tolerance
Refers to one of: Low, Medium, High.
This is often the amount of loss anyone is prepared to handle while making an investment decision. Alkemy is not responsible for any investment or financial loss.
Table of Statistical Reference
| Term | Definition |
|---|---|
| Alpha | Alpha refers to excess returns earned on an investment above the benchmark return (usually the S&P 500 benchmark). |
| Beta | Beta is a measure of the volatility of a strategy compared to the market as a whole. In order to make sure it is being compared to the right benchmark, it should have a high R-squared value in relation to the benchmark. A beta of 1 means the strategy is positively correlated 1:1 with the benchmark. A beta of -1 means the strategy is negatively correlated with the benchmark. |
| Treynor Index | Measures the risk-adjusted performance of an investment portfolio by analyzing a portfolio's excess return per unit of risk. The Treynor index uses Beta as the measure of market risk, unlike the Sharpe ratio which uses standard deviation as the measure of market risk. Also known as the reward to volatility ratio. |
| Standard Deviation | Measures the investment's risk and helps in analyzing the stability of returns of a strategy. The lower the standard deviation, the lower the volatility. Standard deviation is calculated by taking the square root of the variance, which itself is the average of the squared differences of the mean. |
| R-Squared | R-squared is generally interpreted as the percentage of a fund or security's movements that can be explained by movements in a benchmark index. An R-squared of 100% or 1 means that all movements of a security (or other dependent variables) are completely explained by movements in the index. |
| # of Trades | The total number of trades from the strategy’s inception date. |
| # Win Trades | The total number of winning trades from the strategy’s inception date. |
| % Win Trades | Calculated as the # of Win Trades divided by the # of Trades. |
| Max Drawdown (MDD) | The maximum drawdown (MDD) is the maximum observed loss from a peak to a trough of a portfolio, before a new peak is attained. Maximum drawdown is an indicator of downside risk over a specified time period, calculated over the last 12 months. |
| Sharpe Ratio | The sharpe ratio is one of the most widely used methods for calculating risk-adjusted return. It is the average return earned in excess of the risk-free rate per unit of volatility or total risk. The Sharpe ratio helps explain whether a strategy’s excess returns are due to smart investment decisions or a result of too much risk. The greater a strategy’s Sharpe ratio, the better its risk-adjusted performance. |
| Sortino Ratio | The Sortino ratio is another measure of risk-adjusted return. differs from the Sharpe ratio in that it only considers the standard deviation of the downside risk, rather than that of the entire (upside + downside) risk. The higher the Sortino Ratio, the better the strategy performed on a risk-adjusted basis. |
| Calmar Ratio | The Calmar ratio uses a strategy’s maximum drawdown as its sole measure of risk. The higher the Calmar ratio, the better the strategy performed on a risk-adjusted basis. |
| Correlation to S&P 500 | A statistical measure that expresses the extent to which two variables are linearly related. It describes the relationship between the strategy and the S&P 500 benchmark. |
| Suggested Minimum Capital | The suggested minimum capital as authored by the strategy owner or trader. |
| Average Win | The average wining trade (dollar value) of a strategy. |
| Average Loss | The average losing trade (dollar value) of a strategy. |