ArthaPilot
DocumentationSearch documentation

Glossary

Terms used in ArthaPilot's tools.

On this page

Core metrics

  • CAGR (compound annual growth rate): The constant annual growth rate that links a starting value to an ending value over a period, assuming compounding. $10,000 growing to $20,000 in 10 years is a CAGR of about 7.2%. Formula: CAGR = (End / Start)^(1/years) - 1.
  • Sharpe ratio: Excess return per unit of volatility. Compare values over the same period and with the same risk-free-rate assumption. A Sharpe of 0.8 means each unit of volatility delivered 0.8 units of excess return.
  • Sortino ratio: Annualized excess return divided by downside deviation from the risk-free rate. Unlike the Sharpe ratio, its denominator counts downside returns rather than variation in both directions. A strategy with large upside swings but small drawdowns will have a higher Sortino than Sharpe.
  • Calmar ratio: Annualized return divided by the size of the worst peak-to-trough decline. It relates growth to the largest drawdown in the measured period. A 10% CAGR with a -20% max drawdown gives a Calmar of 0.5.
  • Ulcer index: Measures how deep and how long drawdowns were over a period. Unlike max drawdown, it counts time spent below a prior peak.
  • UPI (ulcer performance index): Excess return divided by the Ulcer Index. Like the Sharpe Ratio, but it penalizes deep, long drawdowns instead of day-to-day volatility.
  • Omega ratio: The ratio of gains above a chosen threshold to losses below it, using the entire return distribution. A value above 1 means gains outweighed losses at that threshold.
  • Max drawdown: The largest peak-to-trough decline in portfolio value, expressed as a percentage. A max drawdown of -50% means the portfolio lost half its value from its highest point before recovering. Watch (2:35)
  • Standard deviation / volatility: How spread out returns are around their average. Higher volatility means bigger swings in both directions. In most cases, reports show annualized volatility values. A 15% annualized volatility describes the spread of historical returns. It does not limit future moves.
  • Alpha: The portion of a portfolio's historical return not explained by the selected benchmark or factor model. It is model-specific and does not prove skill. An alpha of 2% means the portfolio's modeled annual return exceeded the selected factor model's estimate by 2 percentage points.
  • Beta: Estimated sensitivity to a selected market benchmark over the measured sample. A beta of 1.2 indicates larger moves on average, not a fixed response to each market move. A beta of 0.5 indicates about half the benchmark's movement on average in the measured sample.
  • Tracking error: The standard deviation of the difference between a portfolio's returns and its benchmark. Lower tracking error means the portfolio follows the benchmark more closely.
  • R-squared: The fraction of a portfolio's return variation explained by the factor model. Ranges from 0 to 1. R-squared of 0.95 means the selected factors explain 95% of the portfolio's behavior.
  • F-statistic: An omnibus test of whether the factor coefficients are jointly zero. A small p-value is evidence against that null under the model assumptions.
  • P-value: The probability, assuming the null hypothesis and model assumptions, of a test statistic at least as extreme as the observed one. It is not the probability that the null is true. A p-value below 0.05 is the conventional threshold for statistical significance.
  • Confidence interval: A range calculated from sample data. With a valid 95% method, 95% of intervals built from repeated samples would contain the true parameter.

Portfolio construction

  • Rebalancing: Restoring a portfolio to its target allocation by buying or selling assets after prices drift. If your 60/40 portfolio drifts to 70/30 after a rally, rebalancing sells stocks and buys bonds to return to 60/40.
  • Drift: How far an asset's current weight has moved away from its target weight as prices change. Rebalancing rules and drift alerts both use this gap. A 60% stock target that has grown to 66% of the portfolio has drifted by 6 percentage points.
  • Turnover: How much of the portfolio the strategy buys and sells over a period. Higher turnover means more trading, which raises transaction costs and, in taxable accounts, realized gains.
  • Diversification: Combining assets with imperfect correlation can reduce portfolio risk under the selected weights and period.
  • Correlation: A number from -1 to +1 measuring how two assets move together. +1 means they move together, -1 means opposite movement, and 0 means no linear relationship. A correlation near zero indicates a weak linear relationship over the measured window. It does not establish a hedge in every period.
  • Efficient frontier: The set of portfolios offering the highest expected return for each level of modeled risk under the selected inputs. If Portfolio A has the same return as B but lower volatility, B is below the frontier.
  • Risk parity: An allocation strategy where each asset contributes equally to total portfolio risk. Weights follow risk contribution, not dollar amount. Bonds get a larger dollar allocation than stocks because their volatility is lower.
  • CVaR (conditional value at risk): The expected loss in the worst X% of scenarios (for example the worst 5%). Also called expected shortfall. A CVaR 95% of -12% means that in the worst 5% of outcomes, the average loss is 12%.
  • Monte Carlo: Randomized market paths used to estimate how a plan might behave under different return sequences. The output is a distribution, not a forecast. Running 10,000 simulations shows the 10th-percentile outcome alongside the median, giving a sense of downside risk.
  • Asset location: Choosing which account type (taxable, traditional, Roth) holds each asset, separate from how much of each asset to own. Placement can affect modeled tax drag under the household's tax assumptions. A household model can compare the same target allocation under different account placements and show the after-tax difference.
  • Covariance: How much two assets' returns move together, in squared return units. Dividing it by both volatilities gives the correlation.
  • Shrinkage: Pulling a noisy estimate toward a simpler target, such as zero or the average. Extreme inputs then move the result less. At 50% shrinkage, a covariance estimate sits halfway between the sample value and its diagonal.
  • Tangency portfolio: The mix on the efficient frontier with the highest Sharpe ratio. It earns the most excess return for each unit of volatility.
  • Bootstrap: A resampling method that builds new return paths by drawing past returns with replacement. A block bootstrap draws runs of consecutive periods, so short-term patterns stay intact.

ArthaPilot workflow terms

  • Backtest: A historical replay on observed market data. Backtests answer what happened under the selected dates, prices, cash flows, rebalance rules, and tax assumptions.
  • Simulation: A modeled path under stated assumptions. Monte Carlo simulations use randomized paths. A backtest replays observed market history.
  • Scenario: One configured set of assumptions inside a tool. Changing the date range, tax profile, cash flows, or rebalance rule creates a different scenario.
  • Strategy: A repeatable allocation or rule-based approach. A strategy can be a fixed allocation, a signal-driven rule set, or a reusable Library item.
  • Portfolio: The holdings, allocations, or sleeves in the model. A portfolio can contain one static allocation or multiple strategy sleeves.
  • Account: The ownership and tax wrapper for assets, such as taxable, IRA, Roth, HSA, or 401(k). Account type affects tax treatment, withdrawal rules, and some planning constraints.
  • Analysis: A saved, reopenable set of tool inputs with a current result when available. Saved analyses lists them.
  • Library item: A reusable versioned object. You can load it from the Library into a compatible tool.
  • Tax drag: The modeled reduction in portfolio returns from taxes and when the investor pays them, measured against a pre-tax path. ArthaPilot reports tax drag when the selected workflow compares pre-tax and after-tax paths.
  • IS/OOS (in-sample / out-of-sample): A split of one backtest into two windows. The in-sample window fits or selects a rule. The out-of-sample window tests the same rule on dates it did not use. A signal tuned on 2000 through 2018 data is an in-sample fit. The same signal on 2019 through 2024 data is the out-of-sample test.

Signals & technical analysis

  • SMA (simple moving average): The average price over the last N days, used as a trend indicator. When price crosses above its 200-day SMA, the rule treats the trend as bullish.
  • RSI (relative strength index): A momentum oscillator from 0-100. Above 70 may be overbought, below 30 oversold.
  • VIX: The CBOE Volatility Index. Measures expected market volatility over the next 30 days from S&P 500 option prices. A VIX of 12 signals calm markets. A value above 30 signals significant fear. Traders also call this index the "fear gauge."
  • Momentum: The strength of a recent price trend, often measured by return over a chosen lookback period. Momentum strategies test whether that trend persists. 12-month momentum: if a stock is up 20% over the past year, it has positive momentum.
  • Whipsaw: When a signal triggers a trade that quickly reverses, causing a loss from the false signal. A moving-average crossover triggers a buy, but the price immediately falls back below the average.
  • Fat tails: The observation that extreme market events (crashes, spikes) happen more often than a normal distribution would predict.
  • Regime: A market state, such as risk-on or risk-off, that a model or signal labels from data. Rules can change the allocation when the regime changes.
  • Walk-forward validation: A test that fits a rule on one window of history, tests it on the next window, then rolls both windows forward.

Tactical and ranked allocation

  • Allocation rule: A named asset mix that becomes active when its signal is true. Strategy Builder checks rules top to bottom, and the first rule whose signal is true wins.
  • Fallback rule: The last allocation rule in a strategy, used when no earlier rule's signal fires. Has no signal condition.
  • Ranked allocation: An allocation rule that picks tickers dynamically by scoring a universe on a chosen metric and holding the top or bottom N.
  • Universe: The set of candidate tickers a ranked rule chooses from. In Strategy Builder, the universe holds 2 to 29 plain tickers. It excludes ticker expressions and bond modifiers.
  • Fallback ticker: The single ticker a ranked rule holds 100% when zero universe tickers pass filtering (for example when an absolute-momentum threshold knocks everything out). Most setups use a short-term Treasury or cash proxy.
  • Fixed sleeve: A portion of a ranked allocation rule pinned to a fixed ticker and weight. The ranked selection runs on the remaining weight, so a core holding can stay constant while the rest rotates.
  • Rerank cadence: How often a ranked rule recomputes its selection. Between reranks the rule forward-fills the selection. With monthly trading frequency, a ranked rule reranks every 21 trading rows. With quarterly frequency, it reranks every 63 rows.
  • 13612W weighting: Per-lookback weights of 12/4/2/1 applied to 1-, 3-, 6-, and 12-month momentum scores, as used by VAA, BAA, and HAA. The engine combines lookbacks with these weights instead of simple averaging.
  • Breadth gate: A composite signal that is true only when every ticker in a set has positive momentum. Used by BAA and HAA to switch between offensive and defensive ranked universes.
  • Inverse-volatility weighting: Weighting selected tickers proportional to 1 / annualized volatility, so lower-volatility tickers get larger allocations. Falls back to equal weighting when any selected ticker has zero or missing volatility.

Leverage

  • Notional exposure: The total market value a portfolio controls, including leverage. Investing $10,000 in a 3x ETF gives a notional exposure of $30,000.
  • Volatility drag: Structural drag on daily-reset leveraged products that grows with the square of leverage times variance. Even with zero financing and fees, a 3x LETF in a choppy sideways market underperforms its 3x arithmetic reference. A 3x leveraged fund in a flat but volatile market underperforms because drag scales with L-squared times variance.
  • Leverage ratio: The multiplier applied to an underlying asset's returns. 2x means twice the daily gain or loss.
  • LETF (leveraged ETF): Leveraged ETF. An exchange-traded fund using derivatives to deliver a multiple of its benchmark's daily return. UPRO (3x S&P 500), TQQQ (3x Nasdaq-100), SSO (2x S&P 500).
  • Daily reset: Leveraged ETFs reset their target leverage each day, causing multi-day returns to diverge from a simple multiple of the benchmark.
  • Financing rate: The interest rate charged on borrowed notional inside a leveraged position or ETF. The app's composite series stitches broker-call money, Fed Funds, and SOFR so long histories remain consistent. Daily financing drag is (L - 1) x rate.
  • Financing spread: The basis-point premium dealers charge above the risk-free financing rate for the swap or margin loan that implements the leverage. Modeled as a flat value, a rate-dependent curve, or a fund-specific schedule.
  • Kelly criterion: A formula for the bet size or leverage level that maximizes long-run compound growth. The resulting size is the Kelly fraction. A bet above this fraction lowers growth and increases the risk of deep losses.
  • Growth-optimal leverage (k*): The leverage multiple that historically maximized compound growth for an asset under the modeled cost assumptions. Above k*, extra leverage adds volatility drag faster than it adds return.

Factor models

  • Fama-French factors: A family of asset pricing models that explain returns using market, size, value, profitability, and investment factors. FF3 uses market, SMB (size), and HML (value). FF5 adds profitability and investment.
  • SMB (small minus big): The Fama-French size factor: return spread between small-cap and large-cap stocks. Positive SMB beta means the portfolio tilts toward smaller companies.
  • HML (high minus low): The Fama-French value factor: return spread between high book-to-market and low book-to-market stocks. Negative HML beta means the portfolio behaves more like growth stocks.
  • Market beta: The sensitivity of a portfolio to the broad equity market factor. A beta of 1 means the portfolio moves with the market.
  • Excess returns: Portfolio returns minus the risk-free rate. Used in factor regressions to isolate risk premia from the baseline rate.
  • Factor loading: How strongly a return moves with one factor, estimated by regression. A loading of 1.2 on the market factor is a market beta of 1.2.

Tax concepts

  • Marginal vs effective tax rate: The marginal rate applies to the next dollar of taxable income. The effective rate is total tax divided by total income. Deductions and lower brackets often make the effective rate lower. Someone in the 24% bracket might have a 16% effective rate because the first dollars fall in the 10% and 12% brackets.
  • AGI (adjusted gross income): Total income minus specific deductions, before the standard or itemized deduction. The Form 1040 line many other tax calculations start from.
  • MAGI (modified adjusted gross income): AGI with certain items added back. Different rules use different MAGI definitions: NIIT, IRMAA, and ACA subsidies each compute their own version. For ACA purposes, MAGI adds back nontaxable Social Security. For NIIT, it adds back foreign earned income exclusions.
  • Filing status (MFJ, MFS, hoH): The IRS category that sets your brackets and thresholds: single, married filing jointly (MFJ), married filing separately (MFS), or head of household (HoH).
  • AMT (alternative minimum tax): A parallel tax calculation that adds back certain deductions. You pay whichever is higher: regular tax or AMT. Most commonly triggered by ISO exercises and large SALT deductions.
  • AMTI (alternative minimum taxable income): The income base for the alternative minimum tax. The calculation starts from regular taxable income and adds back preference items, such as the ISO spread and SALT deductions. Regular taxable income of $80,000 plus a $40,000 ISO spread gives $120,000 of AMTI.
  • ISO (incentive stock option): Incentive Stock Option. The spread at exercise does not count as ordinary income, but it is an AMT preference item. Exercising ISOs with a $40k spread adds $40k to your AMT income, even though regular tax ignores it.
  • NSO (non-qualified stock option): Non-Qualified Stock Option. The spread at exercise counts as ordinary income on your W-2.
  • RSU (restricted stock unit): A company promise to deliver shares on a vesting schedule. The share value at vest counts as ordinary wages. A grant of 100 shares vests at a $50 price. The vest adds $5,000 of ordinary income, and the shares carry a $5,000 cost basis.
  • Wash sale: IRS rule disallowing a tax loss if you buy substantially identical securities within 30 days before or after the sale. Sell VTI at a loss. Then, buy VTI again within 30 days. The wash sale rule disallows the loss and adds it to the new cost basis.
  • Tax-loss harvesting: Intentionally selling losing positions to realize losses that can offset gains under IRS rules. Wash-sale rules can defer the benefit. Sell a position that has lost $5,000 to offset $5,000 of capital gains elsewhere.
  • Tax lot: One purchase of shares tracked as a unit: its date, share count, and price paid. The engine computes gains, losses, and holding periods per lot when you sell shares.
  • Cost basis: What you paid for an investment, including adjustments such as reinvested dividends. Your taxable gain or loss is the sale price minus the cost basis.
  • Cost basis method: The rule for deciding which shares a partial sale takes from the position: FIFO, LIFO, specific identification, or average cost. The method affects the size and timing of taxable gains.
  • HIFO (highest in, first out): A cost basis method that sells the highest-basis shares first. It realizes the smallest gain among the available lots. You hold lots bought at $40 and $60. HIFO sells the $60 lot first and realizes the smaller gain.
  • Short-term vs long-term capital gains: Gains on assets held one year or less are short-term and taxed at ordinary income rates. Gains on assets held longer are long-term and taxed at preferential rates (0%, 15%, or 20%).
  • Qualified vs ordinary dividends: Qualified dividends meet IRS holding-period rules and qualify for the lower long-term capital gains rates. Ordinary (non-qualified) dividends fall under regular income rates.
  • SALT (state and local taxes): The federal itemized deduction for eligible state and local income, sales, and property taxes, subject to the limit and rules for the applicable tax year.
  • QBI (qualified business income): Profit from a qualified trade or business. The Section 199A deduction removes up to 20% of it from regular taxable income, subject to income limits. A business with $100,000 of qualified business income can deduct up to $20,000 before the income limits apply.
  • Roth conversion: Moving money from a pre-tax retirement account to Roth. The pre-tax portion of the converted amount counts as ordinary income in the conversion year. Converting $50,000 from a traditional IRA adds that amount to taxable income this year. You can take Roth earnings tax-free when your distribution meets the qualified-distribution rules.
  • NIIT (Net Investment Income Tax): Net Investment Income Tax. An additional 3.8% tax on investment income for individuals above $200k MAGI ($250k MFJ). If your MAGI is $300k (MFJ), the 3.8% applies to the lesser of your investment income or the $50k over the threshold.
  • Pro-rata rule: The IRS rule that splits an IRA conversion or withdrawal into taxable and tax-free parts. It uses the ratio of pre-tax to total balances across all your traditional IRAs. Pre-tax IRA money therefore makes part of a backdoor Roth conversion taxable.

Retirement & planning

  • Safe withdrawal rate (SWR): The highest annual withdrawal percentage that survived the modeled period and rules. Historical SWR is sample-specific. The classic "4% rule" means withdrawing 4% of the starting balance per year, adjusted for inflation.
  • PWR (perpetual withdrawal rate): The withdrawal rate that would have preserved the portfolio's inflation-adjusted starting value over the modeled period.
  • VPW (variable percentage withdrawal): A withdrawal method that pays a percentage of the current balance each year. The percentage changes with the remaining horizon and the equity allocation, so spending rises as the horizon shortens.
  • Guyton-Klinger: A withdrawal method that starts from an initial withdrawal rate. The capital preservation rule cuts spending when the current rate rises too high. The prosperity rule raises spending when it falls too low. The default adjustment is 10%.
  • Sequence of returns: The order in which yearly returns arrive. Two periods can share one average return and still end differently when money flows in or out during the period. A 20% loss in the first retirement year hurts more than the same loss in year 20, because early withdrawals lock in the decline.
  • Sequence risk: The risk that return order changes outcomes when a portfolio has contributions or withdrawals. Poor early returns during withdrawals can reduce the balance available for recovery. Two retirees with the same average return but different sequences can end with different balances.
  • Decumulation: The spending phase after saving ends. Withdrawal order, withdrawal size, and taxes each drive how long the portfolio lasts.
  • Survival curve: Cumulative share of simulated paths still solvent over time. Shows depletion timing instead of compressing it to one number.
  • RMD (required minimum distribution): The minimum amount the IRS requires you to withdraw from pre-tax retirement accounts each year once you reach the required age. Missing an RMD triggers an excise tax on the shortfall.
  • Roth 5-year clock: Each Roth conversion starts a five-year waiting period before that converted amount can be withdrawn penalty-free (before age 59 1/2). Planning tools track these clocks per conversion year.
  • Glidepath: A planned shift in allocation over time, such as moving from stock-heavy to bond-heavy as retirement approaches. Target-date funds follow a built-in glidepath.
  • COLA (cost-of-living adjustment): A yearly increase that tracks inflation. Social Security benefits and some pensions apply a COLA. A 0% COLA holds purchasing power constant in the planner.
  • ACA (health insurance marketplace): The health insurance law that created the marketplace. Marketplace plans can carry a premium tax credit that depends on household income, so income changes can raise or lower the subsidy.
  • ACA premium tax credit (PTC): The subsidy that lowers health-insurance premiums for marketplace (ACA) plans, based on household income relative to the federal poverty level. Crossing an income threshold can shrink or eliminate the credit, a drop often called the subsidy cliff.
  • FPL (federal poverty level): The government income benchmark, scaled by household size, that ACA subsidies and other programs measure income against. ACA thresholds use percentages of FPL.
  • SLCSP (second-lowest-cost silver plan): The marketplace benchmark plan used to calculate ACA premium tax credits. ACA rules use the benchmark premium and your expected contribution to calculate your credit. The credit cannot exceed the premium for your eligible selected plan.
  • Real vs nominal dollars: Nominal dollars are face amounts with inflation left in. Real dollars restate those amounts in today's purchasing power. In most cases, long-horizon plans report real dollars to keep amounts comparable across decades.

Other terms

  • DCA (dollar-cost averaging): Investing a fixed dollar amount at regular intervals regardless of price. Investing $500/month buys more shares when prices are low and fewer when high.
  • Basis point (bps): One hundredth of a percentage point. Fees, spreads, and drag often appear in basis points. 25 bps = 0.25%.
  • T-bill (Treasury bill): A short-term United States government debt security, commonly used as a low-risk rate benchmark. Its interest is exempt from state and local income tax.
  • Risk-free rate: The return on a theoretically riskless investment. Short-term Treasury bills are the standard proxy.
  • FDIC (federal deposit insurance corporation): A government agency that insures eligible bank deposits up to $250,000 per depositor, per insured bank, per ownership category. Treasury ETFs are securities, not bank deposits.
  • ATH (all-time high): The highest price an asset has ever reached. The ATH Proximity tab in the Asset Analyzer shows how close an asset is to its ATH over time.
  • APY (annual percentage yield): The effective annual rate of return on a deposit or investment, accounting for compound interest. A 5.0% APY means $10,000 grows to $10,500 in one year with compounding.