Performance & Returns
Arithmetic vs geometric returns, TWR vs MWR, alpha, beta, Sharpe, Sortino, drawdowns and how to actually judge a track record.
intermediate · 4h 30 · 25 lessons
Course content
Arithmetic Return: The Simple Average
Understand the most basic measure of return, its calculation, uses, and limitations.
Geometric Return: The True Growth Rate
Learn about the geometric return, which accurately reflects the compound annual growth rate of an investment over multiple periods by accounting for compounding.
Arithmetic vs. Geometric: When to Use Which
Differentiate between arithmetic and geometric returns to understand their appropriate applications in investment analysis and reporting.
Time-Weighted Return (TWR): Manager Performance
Explore the Time-Weighted Return (TWR), a measure of portfolio performance that eliminates the impact of external cash flows, making it ideal for evaluating investment managers.
Money-Weighted Return (MWR): Your Personal Experience
Understand the Money-Weighted Return (MWR), a measure that considers the timing and size of all cash flows, reflecting the investor's individual experience.
TWR vs. MWR: A Tale of Two Returns
Compare and contrast Time-Weighted Return (TWR) and Money-Weighted Return (MWR) to understand when each is appropriate for different stakeholders and objectives.
Absolute Return: Simple Gains and Losses
Define absolute return as the total gain or loss of an investment over a specific period, without comparison to a benchmark.
Relative Return: Performance Against a Benchmark
Understand relative return, which measures an investment's performance compared to a specific benchmark, crucial for evaluating active management.
Alpha (Jensen's Alpha): The Manager's Edge
Examine Jensen's Alpha, a risk-adjusted measure of an investment's performance that indicates the excess return generated independently of market movements (beta).
Beta: Measuring Market Sensitivity
Understand Beta, a key measure of an investment's systematic risk and its sensitivity to overall market movements.
Sharpe Ratio: Reward Per Unit of Total Risk
Learn about the Sharpe Ratio, a widely used risk-adjusted performance measure that assesses the excess return per unit of total risk (standard deviation).
Sortino Ratio: Reward Per Unit of Downside Risk
Discover the Sortino Ratio, a risk-adjusted performance measure that focuses specifically on downside risk, distinguishing harmful volatility from beneficial upside volatility.
Drawdowns: The Pain of Losing Money
Understand drawdowns, which quantify the peak-to-trough decline of an investment's value, and their importance in risk management.
Calmar Ratio: Return vs. Maximum Drawdown
Learn about the Calmar Ratio, a risk-adjusted performance measure that assesses return relative to the maximum drawdown experienced, focusing on tail risk.
Value-at-Risk (VaR): Quantifying Potential Loss
Understand Value-at-Risk (VaR) as a measure of potential loss in a portfolio over a specified period with a given confidence level.
Conditional Value-at-Risk (CVaR): Beyond the VaR Threshold
Explore Conditional Value-at-Risk (CVaR), a more robust risk measure that quantifies the expected loss when that loss exceeds the Value-at-Risk (VaR) threshold.
Max Drawdown & Recovery: Paths of Loss and Rebound
Examine maximum drawdown, its duration, and the time required for recovery, key aspects of risk assessment and investor resilience.
Tracking Error: Deviations from the Benchmark
Understand tracking error as a measure of the volatility of the difference between a portfolio's return and its benchmark's return, reflecting active risk.
Information Ratio: Alpha Per Unit of Active Risk
Learn how the Information Ratio assesses the efficiency of an active manager by measuring the excess return generated relative to the active risk (tracking error) taken.
Treynor Ratio: Reward Per Unit of Systematic Risk
Understand the Treynor Ratio, a risk-adjusted performance measure that uses beta (systematic risk) in its denominator, making it suitable for diversified portfolios.
R-squared: Explaining Performance Variation
Understand R-squared ($R^2$) as a statistical measure that indicates the proportion of a portfolio's movement that can be explained by the movement of its benchmark.
Regression Analysis: Unpacking Returns
Learn how regression analysis is used in finance to decompose portfolio returns, estimate risk measures (beta), and evaluate manager performance (alpha).
Peer Group Analysis: Benchmarking Against Competitors
Understand peer group analysis as a method of evaluating investment performance by comparing a fund or manager against a group of similar entities.
Performance Attribution: What Drove Returns?
Learn about performance attribution, a technique used to break down a portfolio's return relative to its benchmark into components, explaining sources of out/underperformance.
Judging a Track Record: A Holistic Approach
Synthesize various performance and risk metrics to develop a holistic framework for evaluating an investment manager's true track record and skill.