CIPM Level I flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Time-weighted return

A return calculation that eliminates the impact of external cash flows by geometrically linking sub-period returns; it measures the manager's investment performance independent of client cash flow timing.

Money-weighted return

An internal rate of return that reflects the timing and size of external cash flows; it measures the actual return earned by the investor and is affected by contribution and withdrawal decisions.

Modified Dietz method

An approximation of TWR that weights each external cash flow by the fraction of the period it is invested; it is used when daily valuations are unavailable but flows are significant.

Simple Dietz method

A return approximation that assumes all external cash flows occur at the midpoint of the period; it is less accurate than Modified Dietz when flows are large or unevenly timed.

Geometric linking

Compounding sub-period returns by multiplying (1 + r) for each period and subtracting one; it is required for multi-period TWR and reflects the effect of compounding.

Brinson allocation effect

The portion of active return attributable to sector weighting decisions, calculated as the sum of (portfolio weight minus benchmark weight) times (benchmark sector return minus benchmark total return).

Brinson selection effect

The portion of active return attributable to security selection within sectors, calculated as the sum of benchmark weight times (portfolio sector return minus benchmark sector return).

Interaction effect

The attribution term capturing the joint impact of weighting and selection decisions, calculated as the sum of (portfolio weight minus benchmark weight) times (portfolio sector return minus benchmark sector return).

True daily valuation

A TWR method that values the portfolio at the end of each day and on the date of every external cash flow, then geometrically links daily returns; it is the most accurate TWR approach.

External cash flow

Capital that enters or leaves a portfolio, such as client contributions, withdrawals, or transfers of assets; it is excluded from TWR calculations because it is not controlled by the manager.

Large cash flow

A cash flow whose size may distort performance if the portfolio is not valued on its date; GIPS requires firms to define large cash flow for each composite and value portfolios on those dates.

Sharpe ratio

Excess return over the risk-free rate divided by the standard deviation of returns; it measures return per unit of total risk and suits portfolios representing an investor's entire risky wealth.

Treynor ratio

Excess return over the risk-free rate divided by beta; it measures return per unit of systematic risk and suits well-diversified portfolios or components of a larger diversified portfolio.

Jensen's alpha

The portfolio return minus the CAPM-required return based on beta; a positive alpha indicates the manager outperformed the return justified by systematic risk exposure.

M-squared (M²)

A risk-adjusted measure that scales the portfolio's excess return to the market's volatility level and adds the risk-free rate, expressing performance in return units for direct comparison.

Information ratio

Active return (portfolio minus benchmark) divided by tracking error, the standard deviation of active returns; it measures active return per unit of active risk taken.

Tracking error

The standard deviation of the difference between portfolio and benchmark returns over time; it quantifies the variability of active return and is a key input to the information ratio.

Sortino ratio

Excess return over a target divided by downside deviation, which considers only returns below the target; it is useful when return distributions are asymmetric or investors fear losses.

Appraisal ratio

Alpha from a multi-factor regression divided by the standard deviation of residuals; it measures value added per unit of idiosyncratic risk not explained by the factors.

Downside deviation

The standard deviation of returns that fall below a specified target or minimum acceptable return; it is used in the Sortino ratio and focuses on harmful volatility.

Statistical significance of alpha

A t-test on alpha determines whether outperformance is distinguishable from zero; a t-statistic below about 2 typically indicates insufficient evidence of manager skill.

GIPS firm-wide compliance

A firm may claim GIPS compliance only if it applies the standards to all actual, fee-paying, discretionary portfolios included in at least one composite; selective application is prohibited.

Composite definition

A grouping of portfolios managed according to a similar investment mandate, objective, or strategy; all actual, fee-paying, discretionary portfolios meeting the definition must be included.

GIPS five-year minimum

Firms must present at least five years of GIPS-compliant performance, building to ten years; firms in existence less than five years must present performance since inception.

GIPS compliance statement

A required statement that the firm claims compliance with GIPS and has prepared and presented the report in compliance; it must also disclose whether the firm has been verified.

GIPS verification

An independent third-party review of a firm's compliance with GIPS firm-wide; it is voluntary, does not ensure the accuracy of any specific composite, and must be disclosed.

Net-of-fee returns

Returns reduced by actual investment management fees; if model fees are used, the firm must disclose that returns are net of model fees and describe the model used.

GIPS required disclosures

Mandatory items including composite and benchmark descriptions, fee schedule, assets, number of portfolios, internal dispersion, and the compliance statement; omissions violate GIPS.

Internal dispersion

A measure of the spread of individual portfolio returns within a composite; GIPS requires it for composites with six or more portfolios for annual periods.

GIPS valuation frequency

Portfolios must be valued at least monthly and on the date of all large cash flows; firms must define large cash flow for each composite and apply the definition consistently.

GIPS and local law

GIPS does not override local laws or regulations; if a conflict exists, firms must comply with local requirements and disclose the conflict in the presentation.

GIPS total return

Returns must include realized and unrealized gains and losses and income, be net of actual trading expenses, and be calculated at least monthly using time-weighted returns.