Core Investment Performance, Risk, and Portfolio Metrics
Summary
This glossary introduces common measures for evaluating investments and trading strategies. It explains cumulative, annualized, and monthly returns; benchmark-relative performance; win rate and reward-to-risk; information ratio; standard deviation; alpha and beta; and the Sharpe ratio. The entries describe what each metric is intended to capture and give formulas or examples for several, including how information ratio relates excess return to tracking error and how beta measures an asset’s covariance with market returns.
The material emphasizes that individual metrics need context: win rate depends on the size of wins and losses, benchmark comparisons depend on the selected index, and volatility measures do not directly indicate return. It also notes that simple annualization omits compounding and that cumulative return is unsuitable when there are contributions or withdrawals. The glossary is incomplete in the supplied text, and some explanations are simplified; it offers no empirical strategy evaluation, and risk measures such as standard deviation do not capture every kind of loss or uncertainty.
Key ideas
- Cumulative and monthly returns describe performance over specified periods, while annualized returns help compare different holding periods.
- Benchmark returns provide a reference for judging relative performance, but results depend on benchmark choice.
- Win rate should be assessed alongside average gains and losses because frequent winning trades do not guarantee profitability.
- Information ratio compares benchmark-relative return with tracking error, while Sharpe ratio compares excess return with total volatility.
- Standard deviation and beta describe different aspects of risk and do not guarantee future behavior.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.