Glossary of Terms
A few of the more technical terms use throughout the document are explanation here.
Risk and Return Profile
A total rate of return including appreciation (depreciation), realized capital gains (losses), and income. A quarterly return is calculated and then chain- linked to calculate time-weighted rates of return for the periods under study. Returns are presented on a compounded annualized basis.
Used extensively as a measure of dispersion about the average (mean) in applied statistics. It is a measure of the historical variability of the return earned by an investment portfolio. The assumption is that greater variability in the rate of return connotes greater risk undertaken in achieving the return.
A benchmark that is thought to carry little or no risk because its return is typically guaranteed. Generally, we use the 3-month T-bill rate.
Relates the rate of return earned above the risk-free rate to the standard deviation of the portfolio’s return as a measure of the volatility of the portfolio’s return. Allows the comparison of different portfolios to each other or to the benchmark on a risk-adjusted basis. The Sharpe Ratio is one measure of return per unit of risk.
A measure of a portfolio’s return in excess of the market return, both adjusted for risk. It is a measure of the manager’s contribution to performance due to security selection. A positive alpha indicates that the portfolio outperformed the market on a risk-adjusted basis. A negative Alpha indicates the portfolio did worse than the market.
A measure of the sensitivity of a portfolio’s rates of return to those of the market. The broad market portfolio has a ßeta of 1.0. A ßeta greater than 1.0 indicates that the returns on the portfolio can be expected to rise and fall more quickly than the market. A ßeta less than 1.0 indicates that the portfolio’s movement would be slower than the market’s.
A measure of diversification that indicates the extent to which fluctuations in portfolio returns are explained by market action. An R2 of 0.75 implies that 75% of the fluctuation in a portfolio’s return is explained by the fluctuation in the market.
Relates the rate of return earned above the risk-free rate to the portfolio ßeta during the same time period. The Treynor Ratio is another popularly used measure of the portfolio’s return per unit of risk. Higher Treynor Ratios indicate higher returns per unit of risk.
Monthly Statistics
A measure of volatility or dispersion of a variable, given as the average squared deviation of that variable from its mean value.
Regression Statistics
A measure (ranging in value from 1.00 to -1.00) of the association between a dependent variable (fund, portfolio) and one or more independent variables (index). A correlation coefficient is a measure not necessarily of causality but rather of the strength of a relationship. A correlation coefficient of 1.00 implies that the variables move perfectly in lockstep; a correlation coefficient of -1.00 implies that they move inversely in lockstep; and a correlationship of 0.00 implies that the variables as calibrated are uncorrelated.
A measure of the variability of a portfolio’s return that cannot be explained by market fluctuations. A low standard error indicates that portfolio returns are closely correlated with market returns (as a result of a high degree of diversification.)