Understand investment products, market mechanics, indicators and research terminology. Each entry includes an explanation, example, cautions and related learning.
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Tracking difference is the signed gap between a fund's return and its benchmark's return over a stated period, found by subtracting the benchmark return from the fund return. A negative value means the fund lagged the benchmark and a positive value means it exceeded it.
Tracking error is the standard deviation of the return gap between a fund or portfolio and its benchmark over time, usually annualized. It measures how consistently a fund follows its benchmark, not whether it is ahead of or behind it.
Transaction costs are everything it costs to enter and exit positions beyond the price move itself. They include explicit charges such as commissions, exchange fees and taxes, and implicit costs such as the bid-ask spread, slippage and market impact.
Value at Risk is a loss threshold for a portfolio over a set horizon, estimated so that losses are expected to exceed it only with a small stated probability, such as 5%. A 95% one-day VaR of HK$20,000, for example, means a loss larger than HK$20,000 is expected on about 1 day in 20 under the model's assumptions.
Vega is the option Greek that estimates how much an option's price changes for a one percentage point (one volatility point) change in implied volatility, holding other inputs constant. Both calls and puts have positive vega when bought.
Volatility measures how widely an asset's returns vary around their average, most often as the standard deviation of returns, usually quoted as an annualized percentage. Higher volatility means larger price swings in both directions, not a particular direction.
Walk-forward analysis is a validation method that repeatedly fits a strategy's parameters on a past training window and then evaluates them, unchanged, on the next unseen test window, moving both windows forward through history. Performance is judged only on the stitched-together test windows.
Yield to maturity (YTM) is the single annualized rate that discounts all of a bond's remaining scheduled coupons and principal to its current market price. It summarizes the return implied by buying at today's price and holding until maturity.