Category

Item type

Term	Definition	Formula	How to read it	Notes & cautions
Total Return TR Return basics Performance / return Also known asTotal return	Overall gain including price change and cash distributions over a period.	((Ending Value − Beginning Value) + Income) ÷ Beginning Value	Use for a complete view of performance; compare with price return to see income impact.	If taxes or fees are excluded, label the context; reinvested dividends lift long-term TR.
Annualized Return CAGR Return basics Performance / return Also known asCompound annual growth rate	Geometric average return per year over multiple periods.	((Ending Value ÷ Beginning Value) ^ (1 ÷ Years)) − 1	Makes multi-year results comparable; use with volatility to judge consistency.	Large interim swings can be hidden; check drawdowns and cash flows.
Time-Weighted Return TWRR Return basics Performance / return Also known asTime-weighted rate of return	Measures performance excluding impact of external cash flows.	Chain returns of each sub-period separated by cash flows.	Best for judging manager skill; preferred in fund factsheets.	Sensitive to valuation timing when prices are stale; use official NAVs when possible.
Money-Weighted Return MWRR / IRR Return basics Performance / return Also known asDollar-weighted return	Return that incorporates size and timing of cash contributions and withdrawals.	Internal rate of return solving: 0 = Σ (Cash Flow_t ÷ (1+r)^(t)).	Captures investor experience; use when contributions are irregular.	Easily skewed by large late cash flows; compare with TWRR to diagnose timing effects.
Benchmark BM Benchmark & alpha Performance / return Also known asReference index	Reference portfolio used to judge relative performance and risk.	Not a formula; choose index whose risk profile matches the strategy.	Check if benchmark fits holding style; mismatch can distort alpha and tracking error.	Style drift or heavy cash holdings lower comparability; document benchmark changes.
Excess Return Benchmark & alpha Performance / return Also known asActive return	Difference between portfolio return and benchmark return.	Portfolio Return − Benchmark Return	Track monthly to see consistency; annualize for multi-year view.	Negative excess return may still be acceptable if risk is meaningfully lower.
Alpha α Benchmark & alpha Performance / return Also known asJensen's alpha	Risk-adjusted excess return after accounting for market exposure.	Alpha = Portfolio Return − [Risk-Free + Beta × (Benchmark Return − Risk-Free)]	Shows value added beyond market moves; evaluate alongside tracking error.	Alpha depends on the chosen model; unstable beta estimates can mislead results.
Information Ratio IR Benchmark & alpha Performance / return Also known asIR	Excess return per unit of active risk (tracking error).	Information Ratio = Excess Return ÷ Tracking Error	Higher is better for consistent active skill; compare to peers with similar mandates.	Short track records make IR noisy; seasonal styles may need longer horizons.
Tracking Error TE Benchmark & alpha Risk & volatility Also known asActive risk	Standard deviation of excess returns versus the benchmark.	Tracking Error = StdDev(Portfolio Return − Benchmark Return)	Shows activeness; low TE suits index-like mandates, high TE suits concentrated styles.	Extremely low TE can mean closet indexing; sudden spikes hint at style drift.
Standard Deviation σ Risk metrics Risk & volatility Also known asVolatility	Measures how widely returns vary around the average.	σ = sqrt(Σ (r_t − mean)^2 ÷ (n − 1))	Core risk gauge; compare with return to judge reward per unit risk.	Assumes symmetric distribution; fat tails require stress tests.
Beta β Risk metrics Risk & volatility Also known asMarket beta	Sensitivity of a portfolio's returns to benchmark movements.	Beta = Covariance(portfolio, benchmark) ÷ Variance(benchmark)	Beta ~1 behaves like the market; use for hedging and position sizing.	Beta can drift over time; recalc periodically and segment by regime.
Sharpe Ratio Risk metrics Risk & volatility Also known asReward-to-variability ratio	Excess return earned per unit of total volatility.	Sharpe = (Portfolio Return − Risk-Free) ÷ Standard Deviation	Compare funds in same asset class; avoid mixing leverage levels.	Assumes normal distribution and penalizes upside volatility; use Sortino when downside risk matters.
Sortino Ratio Risk metrics Risk & volatility Also known asDownside risk-adjusted return	Excess return per unit of downside volatility below a target rate.	Sortino = (Portfolio Return − Target) ÷ Downside Deviation	Better than Sharpe when upside swings are welcome; pick a realistic target rate.	Downside deviation depends on the chosen target; document whether target is risk-free or hurdle rate.
Value at Risk VaR Risk metrics Risk & volatility Also known asVaR	Estimated maximum loss over a period at a given confidence level.	Depends on method (historical, parametric, Monte Carlo); report horizon and confidence.	Use to set loss limits and risk budgets; complement with drawdown and stress tests.	VaR can miss extreme tail risk; pair with CVaR or scenario analysis.
Conditional Value at Risk CVaR Risk metrics Risk & volatility Also known asExpected shortfall	Average loss if losses exceed the VaR threshold.	Mean of tail losses beyond the chosen VaR percentile.	Highlights tail severity; regulators often prefer it over standalone VaR.	Requires more data to estimate reliably; communicate the confidence level used.
Maximum Drawdown MDD Drawdown & volatility Risk & volatility Also known asMax drawdown	Largest peak-to-trough decline over a period.	MDD = (Trough Value − Peak Value) ÷ Peak Value	Shows worst pain an investor endured; pair with recovery time for resilience.	Single period may hide multiple deep drops; inspect rolling drawdowns too.
Recovery Period Drawdown & volatility Risk & volatility Also known asTime to recovery	Time required to regain the previous peak after a drawdown.	Count of trading days or months from trough back to prior peak.	Shorter recovery shows sturdiness; useful for retirees focusing on capital preservation.	Pair with maximum drawdown; long recoveries can disrupt cash-flow needs.
Downside Deviation Drawdown & volatility Risk & volatility Also known asSemi-deviation	Volatility considering only returns below a minimum or target rate.	Downside Deviation = sqrt(Σ min(0, r_t − target)^2 ÷ n)	Use when protecting downside is priority; feeds into Sortino ratio.	Target choice changes the value; document whether target equals risk-free or zero.
Diversification Ratio Portfolio health Portfolio management Also known asDiversification benefit	Portfolio volatility divided by the weighted average of individual volatilities.	Diversification Ratio = Portfolio Vol ÷ Σ (Weight_i × Vol_i)	Lower ratio (<1) means benefits from diversification; high values suggest concentration risk.	Correlation shifts over time; recompute during stress periods.
Correlation ρ Portfolio health Portfolio management Also known asPearson correlation	Measures how two assets move together, from −1 to +1.	Correlation = Covariance(A,B) ÷ (StdDev(A) × StdDev(B))	Pair with diversification ratio; rising correlations shrink diversification benefits.	Correlation is unstable in crises; monitor by regime and asset class.
Portfolio Turnover Portfolio health Portfolio management Also known asTurnover ratio	Percentage of portfolio replaced by trading during a year.	Turnover = min(Total Purchases, Total Sales) ÷ Average AUM	High turnover may mean higher costs and taxes; align with strategy style.	Check if turnover spikes coincide with performance dips; may indicate costly timing.
Rebalancing Band Portfolio health Portfolio management Also known asRebalancing threshold	Tolerance range around target weights that triggers rebalancing when breached.	Example: trigger when asset weight drifts ±5% absolute or ±20% relative from target.	Keeps risk profile aligned without over-trading; choose narrower bands for volatile assets.	Document whether rebalancing is calendar-based or threshold-based to set expectations.
Distribution Yield DY Income & fees Income & costs Also known asTrailing yield	Cash distributed over the past year divided by current price or NAV.	Distribution Yield = Sum of last 12 months distributions ÷ Current price	Use to gauge income level; compare with payout ratio to see sustainability.	Special distributions can inflate yield temporarily; check distribution policy.
Yield on Cost YOC Income & fees Income & costs Also known asYield on original cost	Current annual income divided by original purchase price per share.	Yield on Cost = Current annual distribution per share ÷ Purchase price per share	Highlights income growth over time for long-term holders; not comparable across investors.	Can encourage anchoring to past cost; still monitor current yield and fundamentals.
Expense Ratio ER Income & fees Income & costs Also known asTER	Annual operating costs charged to a fund as a percentage of assets.	Expense Ratio = Annual fund expenses ÷ Average net assets	Lower is generally better; compare with tracking difference to see real cost.	Watch for additional trading costs and taxes not included in ER.
Payout Ratio Income & fees Income & costs Also known asDividend payout	Portion of earnings paid out as dividends or distributions.	Payout Ratio = Dividends ÷ Net income	Higher ratio means less reinvestment; stable payout with healthy coverage is preferable.	Very high payout can cap growth; very low payout may signal management hoarding cash.