InvestorClaw Educational Reference — Plain English explanations of financial metrics used in portfolio analysis.
What it is: Risk-adjusted return metric that tells you how much excess return you're earning per unit of risk taken.
Formula: (Annual Return - Risk-Free Rate) / Annual Volatility
Interpretation:
- > 2.0 = Excellent (professional-quality risk-adjusted returns)
- > 1.5 = Very Good
- > 1.0 = Good (solid risk-adjusted returns)
- > 0.5 = Modest
- < 0 = Poor (underperformed risk-free rate)
Plain English: A Sharpe of 1.5 means for every 1% of volatility you accept, you're earning 1.5% of excess return. Higher is better.
What it is: Measure of how much your investment's price swings up and down.
What it means:
- Low volatility (5-10%) = Stable, predictable value (bonds, utilities)
- Medium volatility (15-25%) = Typical for diversified stock portfolios
- High volatility (30%+) = Large swings, often tech or growth stocks
- Extreme volatility (50%+) = Penny stocks, speculative positions
Plain English: 18% annual volatility means in a typical year, your returns fall within ±18% of average about 68% of the time.
What it is: Measures how your investment moves compared to the overall market (S&P 500).
What it means:
- Beta = 1.0 = Moves exactly with the market (if S&P drops 10%, you drop ~10%)
- Beta > 1.0 = More volatile than market (amplified swings)
- Beta < 1.0 = Less volatile than market (smoother rides)
- Beta ≤ 0 = Moves opposite the market (rare; some bonds/gold)
Plain English: A stock with beta 1.3 is 30% more volatile than the market. When the S&P 500 drops 10%, this stock typically drops ~13%.
What it is: The worst-case loss you might experience under normal market conditions (95% confidence level).
What it means: 95 times out of 100 years, your losses won't exceed this amount.
Example: VaR of -$50K on a $2M portfolio means in the worst 5% of years, you'd lose up to $50K (2.5% of portfolio).
Plain English: Think of it as the downside scenario to plan for. It answers: "What's the most I could reasonably lose?"
What it is: Average loss on the 5% worst days (goes beyond worst single day).
What it means: When things go really wrong, how bad does it get on average?
Plain English: If VaR is "worst case," CVaR is "average of worst cases." VaR ≤ CVaR always.
What it is: The largest peak-to-bottom loss experienced during the analysis period.
Historical context:
- 2008 Financial Crisis: S&P 500 -57%
- 2020 COVID Crash: S&P 500 -34%
- 2022 Bear Market: S&P 500 -19%
Plain English: Shows you what happened in past bad times. Helps you mentally prepare for future crashes.
What it is: Concentration measure on a 0-to-1 scale. Measures how much portfolio risk is concentrated in few positions.
Range:
- 0.01-0.05 = Well-diversified (40+ holdings)
- 0.05-0.15 = Moderate concentration (20-40 holdings)
- 0.15-0.30 = Concentrated (5-20 holdings)
- 0.30+ = Highly concentrated (few large positions)
Formula: HHI = sum of (weight%)². Example: 50% in one stock = 0.25 HHI.
Plain English: Lower HHI = better diversification. An HHI of 0.08 means your portfolio is well-spread across many holdings.
What it is: Total annual return you'll earn if you hold the bond until it matures.
What it includes:
- Annual coupon payments
- Price change from current price to face value at maturity
- Reinvestment of coupon payments
Plain English: The "all-in" return you can lock in right now if you hold to maturity. This is what bond investors compare to find good deals.
What it is: Sensitivity of bond price to interest rate changes. Measured in years.
What it means:
- Duration = 5 years = If interest rates rise 1%, bond price falls ~5%
- Short duration (1-3 years) = Less sensitive to rate changes
- Medium duration (5-7 years) = Typical for many bonds
- Long duration (10+ years) = Very sensitive; large price swings with rate moves
Plain English: Duration tells you how much a bond's price will change if interest rates move. Higher duration = bigger risk/reward.
What it is: Adjusted duration that directly shows price change per 1% interest rate move.
What it means:
- Modified duration = 4.5 = If rates rise 1%, bond price drops 4.5%
- Modified duration = 7.2 = If rates rise 1%, bond price drops 7.2%
Plain English: The practical version of duration. Shows the actual percentage price move for each 1% rate change.
What it is: Fine-tuning to duration; accounts for the curve in the bond price/yield relationship.
What it means: Duration is a straight-line approximation; convexity is the curve.
Plain English: For large interest rate moves, convexity becomes important. Most investors can ignore it for bonds held long-term.
What it is: Annual interest payment as a percentage of face value.
Example: A $1,000 bond with 4% coupon pays $40 per year ($10 quarterly).
Plain English: The guaranteed income you get each year. Different from yield (which includes price moves).
What it is: How your portfolio is divided among asset types: stocks, bonds, cash.
Common allocations:
- Age 30 (growth): 80% stocks, 15% bonds, 5% cash
- Age 50 (balanced): 60% stocks, 35% bonds, 5% cash
- Age 65+ (conservative): 40% stocks, 50% bonds, 10% cash
Plain English: Your "recipe" for risk and return. More stocks = more risk, more return potential. More bonds = more stability.
What it is: Risk from having too much money in too few positions.
Guideline: Prudent investors keep any single stock under 5% of portfolio.
Plain English: If one stock crashes 50%, how much damage to your portfolio? Concentration measures this.
What it is: Annual dividends as a percentage of current stock price.
Example: A $100 stock paying $4/year in dividends has 4% yield.
Context:
- 0-2% = Growth stocks (tech, growth)
- 2-4% = Balanced stocks (blue chips)
- 4-6% = Income stocks (utilities, REITs)
- 6%+ = High yield (risky; verify sustainability)
Plain English: Your cash income from owning the stock. Higher yield = more income, but check if it's sustainable.
What it is: How two investments move together. Range: -1 to +1.
What it means:
- +1.0 = Perfectly correlated (move together exactly)
- +0.5 = Partially correlated (tend to move same direction)
- 0.0 = No correlation (move independently)
- -0.5 = Partially inverse (tend to move opposite)
- -1.0 = Perfectly inverse (always move opposite)
Plain English: Low correlation = good diversification. Gold and stocks often have negative correlation (when stocks drop, gold often rises).
What it is: Difference in yield between two bonds.
Example: If a corporate bond yields 5% and a Treasury yields 2%, the spread is 3%.
What it means: The extra return you get for taking on extra risk (corporate default risk).
Plain English: Wider spreads = more compensation for risk. Tight spreads = market thinks risk is low.
- Well-Diversified: 40+ holdings, HHI < 0.05
- Adequately Diversified: 20-40 holdings, HHI 0.05-0.15
- Concentrated: 10-20 holdings, HHI 0.15-0.30
- Highly Concentrated: < 10 holdings, HHI > 0.30
What it is: Return on U.S. Treasury securities (safest investments).
Used for: Baseline in Sharpe ratio; benchmark for comparing other investments.
Current: InvestorClaw uses 3-month T-Bill yield (updated daily).
What it is: Risk that changing interest rates will significantly impact bond portfolio value.
High duration risk: Long-duration bonds; rates rising = significant losses.
Low duration risk: Short-duration bonds or bond funds; insulated from rate changes.
- What's my portfolio's allocation target, and why?
- What volatility should I expect in a normal year?
- How much can I expect to lose in a bad year (worst-case)?
- Is my bond duration aligned with when I need the money?
- Are my dividend yields sustainable, or at risk of being cut?
Last Updated: April 2026
Source: InvestorClaw v1.0.1 Financial Education System