CIPM Level I key terms

A return measure that removes the effect of external cash flows by computing sub-period returns between each flow and geometrically linking them. It evaluates the manager's investment decisions rather than the timing or size of client contributions and withdrawals.

A TWR variant that revalues the portfolio at the moment of every large external cash flow, creating sub-periods bounded by flows. It is considered the most accurate manager-controlled return but is computationally demanding.

The internal rate of return that equates the present value of all external cash flows and the ending portfolio value to the beginning value. It reflects both manager skill and the investor's own flow-timing decisions.

An approximation of the money-weighted return that weights each external cash flow by the fraction of the period it remained invested. It is simple to compute but can be materially distorted when flows are large relative to the portfolio.

Capital that enters or leaves a portfolio as a result of client-directed activity, such as contributions, withdrawals, or transfers of assets in kind. It is excluded from performance evaluation because the manager does not control it.

Under GIPS, a client-directed external cash flow that the firm defines as large for a given portfolio and that triggers a portfolio revaluation at the date of the flow. The threshold must be documented in firm policy.

Compounding sub-period returns by multiplying one plus each return and subtracting one at the end. It captures the effect of compounding and is the required method for chaining sub-period returns into a TWR.

The simple average of a series of periodic returns, computed by summing them and dividing by the number of periods. It overstates long-run compounded growth and is used mainly to describe average period performance or in attribution effects.

The constant periodic rate that compounds to the total cumulative return over a multi-period horizon, equal to the nth root of the product of one plus each period return, minus one. It measures realized compound growth.

A return restated as an equivalent one-year compound rate, typically by raising one plus the cumulative return to the power of one over the number of years and subtracting one. It permits comparison across horizons of different length.

The total compounded change in portfolio value over a stated period, before any restatement to an annual basis. It answers how much wealth grew, not how fast, and is often reported alongside annualized figures.

Investment return computed before deducting investment management fees, though after trading costs. It isolates the manager's investment contribution and must be presented with a prescribed disclosure under GIPS.

Return reduced by the deduction of investment management fees, and under GIPS by all other costs the firm controls. It approximates what the client actually keeps and is the figure most relevant to fee-paying prospects.

A gross return that has not been reduced by any transaction costs, custodial fees, or other expenses bundled into a composite fee. GIPS permits it only as supplemental information with specific disclosure.

An independent, investable reference portfolio used to judge whether a manager added value relative to the market or strategy the client intended. It should be specified in advance, relevant to the mandate, and measurable and unambiguous.

A benchmark constructed from a blend of indices or a rules-based methodology to match a mandate that no single standard index represents. Its composition and rebalancing rules must be defined and disclosed in advance.

A situation in which the chosen benchmark differs materially from the portfolio's actual exposures, risk profile, or constraints, so that relative results mislead. It is a common source of distorted excess return and flawed manager evaluation.

The difference between a portfolio's return and the return of its benchmark over the same period. It is the headline measure of active management outcome and is often decomposed into allocation and selection effects.

The portion of return attributable to deviations from benchmark weights, whether through security selection, sector allocation, or currency positioning. It is synonymous in practice with excess return over the benchmark.

The standard deviation of active returns, also called tracking error, measuring how much a portfolio's return diverges from its benchmark. It quantifies the consistency, not the direction, of active bets.

A statistical measure of the dispersion of portfolio returns relative to benchmark returns over time, calculated as the standard deviation of the difference series. Low values indicate index-like behavior; high values indicate greater active deviation.

Excess return divided by tracking error, expressing how much active return the manager generated per unit of active risk taken. Higher values suggest more efficient use of deviation from the benchmark.

Excess return over the risk-free rate divided by the standard deviation of total returns. It measures reward per unit of total volatility and is appropriate when the portfolio represents the investor's entire risky holdings.

A return evaluated in relation to the risk taken to achieve it, using measures such as Sharpe, Treynor, or information ratios. It allows comparison of portfolios whose raw returns and volatility differ substantially.

The analytical decomposition of portfolio return relative to a benchmark into sources such as asset allocation, security selection, and currency effects. It explains why active return arose rather than merely how large it was.

A family of arithmetic attribution models that split active return into allocation and selection components by comparing portfolio and benchmark weights and returns across segments. It is the standard framework for equity portfolio analysis.

The part of active return explained by holding different segment weights than the benchmark, measured against benchmark segment returns. It captures the value of the manager's top-down positioning decisions.

The part of active return explained by holding different securities or segment returns than the benchmark within a given weight. It captures the value of the manager's security-picking decisions.

The residual term in arithmetic attribution arising when a manager simultaneously overweights a segment and earns a different return within it. Some models combine it with selection rather than report it separately.

An aggregation of all actual, fee-paying, discretionary portfolios managed to the same strategy, presented as a single record. Under GIPS, composites must include all eligible portfolios and must not cherry-pick favorable accounts.

The documented criteria specifying which portfolios are eligible for inclusion in a composite, including the strategy, minimum asset level, and fee schedule. It must be applied consistently and disclosed to prospective clients.

The firm's authority to implement its intended strategy for a portfolio without client-imposed restrictions that would materially hinder it. Non-discretionary portfolios must be excluded from composites under GIPS.

Globally recognized ethical and disclosure standards for calculating and presenting investment performance, administered by CFA Institute. They aim to give prospective clients a fair, comparable, and fully disclosed view of a firm's track record.

An independent third-party review confirming that a firm's performance presentation and composite construction comply with GIPS. It is voluntary, firm-wide in scope, and does not validate the accuracy of underlying returns.

The reporting of a firm's track record to clients and prospects, including required disclosures, composite statistics, and the period covered. Under GIPS it must include all composites for which the firm manages assets and must not be misleading.

Performance data presented in addition to GIPS-required figures, such as model returns or pure gross returns, which must be clearly labeled and accompanied by disclosure of how it differs from required presentation.

A gradual or deliberate shift in a portfolio's investment approach away from its stated mandate, such as a large-cap value fund buying small-cap growth stocks. It undermines benchmark validity and complicates performance comparison.

A statistical measure of the dispersion of returns around their mean, commonly used as a proxy for total volatility. Larger values indicate wider swings in periodic results and greater uncertainty for the investor.