CIPM Level II flashcards

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

Time-weighted return

A method that breaks the measurement period into sub-periods at each external cash flow and geometrically links sub-period returns, isolating the manager's investment decisions from client-driven cash timing.

Money-weighted return

The internal rate of return that equates initial value plus discounted cash flows to ending value; it reflects both manager decisions and the size and timing of client contributions and withdrawals.

Modified Dietz method

An approximation of money-weighted return that weights each external cash flow by the fraction of the period remaining after it occurred, avoiding daily valuation while accounting for flow timing.

Geometric linking

Combining sub-period returns multiplicatively: one plus the total return equals the product of one plus each sub-period return. Arithmetic addition overstates multi-period results when returns vary.

Annualized return formula

Converting a cumulative return over n years to a yearly rate: take one plus the cumulative return to the power of one over n, then subtract one. Assumes compounding, not simple division.

Large cash flow threshold

A policy-defined flow size, often ten percent of portfolio value, that triggers revaluation and a new sub-period for return calculation; the governing document sets the actual figure.

Sharpe ratio

Excess return over the risk-free rate divided by the standard deviation of returns. It uses total volatility, so it penalizes both systematic and diversifiable risk.

Treynor ratio

Excess return over the risk-free rate divided by beta. It measures reward per unit of systematic risk and suits well-diversified portfolios where unsystematic risk is assumed eliminated.

Jensen's alpha

The return in excess of the capital asset pricing model's predicted return given the portfolio's beta. A positive alpha indicates outperformance beyond what systematic risk exposure explains.

Information ratio

Active return relative to a benchmark divided by tracking error, the standard deviation of that active return. It measures how efficiently a manager converts active risk into excess return.

Tracking error

The standard deviation of the difference between portfolio and benchmark returns over time. Low values indicate closet indexing; high values indicate meaningful active risk taking.

Maximum drawdown

The largest peak-to-trough decline in portfolio value before a new peak is reached. It measures downside severity and the recovery burden a client would have experienced.

Batting average

The percentage of periods in which the portfolio beat its benchmark. It complements magnitude-based measures by showing consistency of outperformance rather than size.

Return attribution

Decomposition of active return into allocation effects from sector or segment weight differences and selection effects from security choices within segments, with interaction terms assigned by policy.

Benchmark specification

A benchmark must be investable, measurable, specified in advance, and consistent with the manager's mandate and style. Changing it after the fact invalidates performance evaluation.

GIPS compliance claim

A firm may state compliance only when it adheres to all applicable provisions of the Global Investment Performance Standards, including composite construction, valuation, and required disclosures.

Survivorship bias

Distortion in manager universe statistics because closed or failed products are removed from databases, leaving only survivors and overstating average historical performance.

Backfill bias

Upward distortion when managers add historical track records to a database only after favorable results, so early reported returns are selectively strong.

Investment mandate statement

A written specification of asset class, benchmark, risk budget, liquidity needs, constraints, and permitted instruments that governs both the manager search and subsequent monitoring.

Minimum track record

A screening criterion requiring a stated history, commonly three to five years or one full market cycle, before a manager is eligible for consideration.

Strategy capacity

The asset level beyond which a manager's process degrades because positions become too large relative to market liquidity or opportunity set.

Key-person risk

Dependence of a firm's investment process on one or a few individuals whose departure would materially impair performance or client confidence.

Organizational due diligence

Review of ownership, succession planning, compensation and retention, staff turnover, regulatory history, and alignment of manager capital with client interests.

Operational due diligence

Review of trade allocation fairness, best execution, valuation policy, custody, business continuity, and cybersecurity controls at a candidate firm.

Style drift

A manager's deviation from the stated investment style over time, detectable through holdings analysis or returns-based style analysis, which can invalidate mandate fit.

Returns-based style analysis

Estimating a manager's effective style exposures by regressing portfolio returns on style index returns, without access to underlying holdings.

Holdings-based style analysis

Determining style from actual portfolio characteristics such as market capitalization, valuation ratios, and sector weights, offering more precision than returns-based methods.

Finalist scoring matrix

A pre-agreed weighted framework scoring quantitative and qualitative factors, with weights and scores documented before finalist meetings to limit hindsight and bias.

All-in fee comparison

Comparing managers on management fee plus performance fee with high-water mark, custody, and estimated trading costs, since headline fee alone can mislead.

High-water mark

A performance fee provision requiring the manager to recover prior losses before charging fees on new gains, protecting the client from paying twice on the same value.

Manager universe

The defined population of candidate products from which screening begins, ideally survivorship-free and matched to the mandate's asset class and style.

Search and selection policy

A documented governance process covering mandate definition, screening criteria, due diligence scope, decision authority, and monitoring, ensuring repeatable and defensible manager choices.