The definitions in this glossary pertain to the context in which we use these words and terms in this book. They may have different meanings in other contexts.

1/N
 A portfolio weighting strategy in which the asset classes within a portfolio are weighted equally. It has been argued that such a strategy performs better out of sample than optimized portfolios, but we argue to the contrary in Chapter 7. See also Mean‐variance analysis.

Absolute illiquidity
 A measure of illiquidity that applies to asset classes that cannot be traded for a specified period of time by contractual agreement or because they are prohibitively expensive to trade within that time frame. See also Partial illiquidity.

Absorption ratio
 A measure of risk concentration that is equal to the fraction of the total variance of a set of asset returns explained or “absorbed” by a fixed number of eigenvectors. See also Eigenvalues, Eigenvectors, and Principal Components Analysis.

Alpha
 The risk‐adjusted return of an asset or portfolio calculated as the asset's or portfolio's excess return net of the risk‐free return less beta times the market's excess return net of the risk‐free return. Alpha is more commonly construed as the difference between an actively managed portfolio's average return and the average return of a benchmark. See also Beta and Capital Asset Pricing Model.

Arithmetic average return
 The sum of a series of discrete returns divided by the number of discrete ...