Reference

Glossary of return-measurement terms.

The vocabulary that turns up in fund prospectuses, portfolio reviews, and CFA curriculum readings. Each entry is short and links to longer treatment where one exists.

Alpha: The excess return of a portfolio over its benchmark, after adjusting for beta. A positive alpha indicates outperformance attributable to skill (or luck); zero alpha indicates returns explained entirely by market exposure.
Annualised return: A return rate expressed on a per-year basis, regardless of the actual holding period. CAGR for buy-and-hold; IRR for cashflow scenarios.
Benchmark: A reference index used to evaluate portfolio performance. The right benchmark matches the portfolio's asset allocation. See the benchmark page.
Beta: A measure of a portfolio's sensitivity to market movements. A beta of 1.0 means the portfolio moves in line with the market; 1.5 means it moves 50 % more; 0.5 means half as much. Used in CAPM to compute expected return.
CAGR: Compound Annual Growth Rate. The constant annual rate that takes initial value to final value over n years. The right number for buy-and-hold investments. See the formulas page.
CAPM: Capital Asset Pricing Model. The classical model relating expected return to systematic risk: E(R) = R_f + β(R_m − R_f).
CFA: Chartered Financial Analyst. The professional designation administered by the CFA Institute, covering portfolio management, financial reporting, and ethics.
Compounding: The process by which earnings on an investment also earn returns. A 7 % return for two years is not 14 % but 14.49 % (because the second year's return applies to the first year's principal-plus-gains).
Drawdown: The peak-to-trough decline in a portfolio's value. Maximum drawdown is the largest such decline observed over a period — used as a measure of downside risk.
Fisher equation: The exact relationship between nominal return, inflation, and real return: (1 + r_nom) = (1 + r_real)(1 + π). See the real return page.
Geometric mean: The compound average of a series of returns, computed as (∏(1 + r_i))^1/n − 1. The correct average for multi-period returns; always less than or equal to the arithmetic mean.
GIPS: Global Investment Performance Standards. The CFA Institute–maintained framework for fair-and-comparable investment-performance reporting.
Information ratio: A measure of active-management skill: excess return over benchmark divided by tracking error. See the risk-adjusted page.
IRR: Internal Rate of Return. The discount rate that makes the net present value of a cashflow series equal to zero. The right return measure when there are intermediate cashflows.
Money-weighted return: Synonym for IRR. Captures the timing of cashflows; reflects the investor's actual experience.
Nominal return: Return before adjusting for inflation. The headline figure on most brokerage statements.
NPV: Net Present Value. The sum of cashflows discounted at a chosen rate. NPV = 0 at the IRR.
Real return: Return after adjusting for inflation. The figure that reflects actual change in purchasing power. Use real returns for long-horizon planning.
Risk-free rate: The theoretical return on a risk-free investment. Proxied by short-term government bills (3-month US T-bills, Singapore SGS bills). Used as the baseline against which risky-asset returns are measured.
Sharpe ratio: The original risk-adjusted return measure: (R_p − R_f) / σ_p. Higher is better. Reference values on the risk-adjusted page.
Sortino ratio: Sharpe variant that uses downside-only deviation in the denominator. Penalises only the volatility you actually mind.
SPIVA: S&P Indices Versus Active. The S&P Dow Jones publication that compares actively-managed funds to index benchmarks. Consistently shows that the majority of active funds underperform after fees.
Time-weighted return: Return measure that strips out the effect of cashflow timing. The right measure of a manager's skill (because the manager doesn't control cashflow timing).
Tracking error: The standard deviation of the difference between portfolio return and benchmark return. Low tracking error means the portfolio closely follows the benchmark; high tracking error means it diverges.
Volatility: Standard deviation of returns. The most common quantitative measure of risk, despite its limitations (it treats upside and downside symmetrically).