Quant Memo

Excess return over a benchmark after accounting for beta; a measure of skill or edge in backtesting.

Sensitivity of strategy returns to a benchmark; measures systematic (market) risk in backtesting.

Annualized return divided by maximum drawdown; emphasizes drawdown risk in backtesting.

Active return per unit of tracking error; measures excess performance vs a benchmark in backtesting.

Largest peak-to-trough decline in cumulative equity; a key risk metric for backtesting and live performance.

Return per unit of total risk (volatility); the standard risk-adjusted performance metric for backtesting.

Two common portfolio weighting schemes; equal weight often tilts toward smaller names and can improve diversification.

Portfolio construction that uses a hierarchical clustering of assets to allocate risk more evenly and robustly.

Mean–variance portfolio theory: optimal diversification by balancing expected return and variance.

Rules for how much capital to allocate per trade or asset (equal weight, risk parity, Kelly, etc.).