CIPM Level II key terms

A performance measure that breaks the period into sub-periods at each external cash flow and geometrically links the sub-period returns, so the manager's results are not distorted by the size or timing of client contributions and withdrawals.

A return that solves for the single discount rate equating all contributions, withdrawals, and the ending value to the beginning value, so it reflects the actual dollar experience of the investor rather than the manager's timing-independent skill.

An approximation of money-weighted return that weights each external cash flow by the fraction of the period it was held, avoiding the need for daily valuations while remaining more accurate than a simple beginning-to-ending calculation.

A time-weighted return computed by revaluing the portfolio on the date of every large external cash flow rather than at fixed intervals, removing the distortion that mid-period flows create in a simple daily-linked calculation.

The practice of pricing a portfolio at the close of every business day, which allows returns to be computed by geometrically linking daily sub-period returns and is a prerequisite for accurate time-weighted results.

Compounding sub-period returns by multiplying one plus each return together and subtracting one, which captures the effect of gains earned on prior gains and is the standard method for multi-period performance reporting.

A compound growth rate that expresses a multi-period return as an equivalent one-year figure, computed by raising one plus the cumulative return to the power of one over the number of years and subtracting one.

The total compounded change in portfolio value over a stated period, expressed without conversion to an annual rate, so a three-year cumulative figure of 30 percent reflects the full gain over those three years.

A specified market index or custom composite against which a portfolio's return and risk are compared, chosen to reflect the opportunity set, style, and constraints of the mandate so that results can be judged fairly.

A benchmark built for a specific mandate, often by blending indices in weights that mirror the portfolio's target asset allocation or by applying the client's tax and liquidity constraints to a standard index.

A benchmark derived from the client's target asset allocation and long-term policy weights, used to evaluate whether tactical deviations and manager selections added value relative to the strategic plan.

A benchmark constructed to match a manager's investment style, such as a small-cap value index for a small-cap value manager, so that performance is compared with peers pursuing a similar approach rather than a broad market index.

The difference between a portfolio's return and the return of its benchmark over the same period, showing how much value the manager added or lost relative to the stated opportunity set.

The annualized standard deviation of the difference between portfolio and benchmark returns, measuring how closely a portfolio follows its benchmark and how much active risk the manager is taking.

Excess return divided by tracking error, expressing how much active return the manager generated per unit of active risk taken, which allows comparison of managers with different risk budgets.

Excess return over the risk-free rate divided by the standard deviation of returns, measuring total risk-adjusted performance and treating upside and downside volatility identically.

Excess return over a target or risk-free rate divided by downside deviation, penalizing only returns below the target so that large upside moves do not reduce the measured risk-adjusted performance.

The portion of return not explained by exposure to the benchmark or to systematic risk factors, often estimated by regression, and commonly interpreted as a measure of manager skill.

A measure of a portfolio's sensitivity to movements in the market or benchmark, where a value above one implies greater-than-market volatility and a value below one implies less.

The proportion of a portfolio's return variation explained by the benchmark or factor model, used to judge how much confidence to place in the accompanying alpha and beta estimates.

A decomposition of portfolio return versus benchmark into components such as allocation, selection, and interaction, showing where the manager's decisions added or subtracted value during the period.

The part of active return attributable to overweighting or underweighting asset classes or sectors relative to the benchmark, holding security selection constant within each segment.

The part of active return attributable to choosing different securities within a segment than the benchmark holds, isolated from the effect of how much was allocated to that segment.

The largest peak-to-trough decline in portfolio value over a stated period, usually expressed as a percentage, which conveys the worst loss an investor would have experienced if buying at the high.

An aggregation of all actual, fee-paying, discretionary portfolios managed to the same strategy, presented as a single track record so that prospective clients see representative rather than cherry-picked results.

Adherence to the Global Investment Performance Standards, a voluntary ethical framework requiring firms to define composites, include all eligible portfolios, and present standardized performance with required disclosures.

The distortion that arises when poorly performing portfolios, managers, or funds are dropped from a dataset, leaving only survivors and making average historical results look better than they actually were.

The upward distortion created when a manager adds a portfolio or fund to a track record only after it has performed well, so early poor results are excluded from the reported history.

The structured process of identifying, screening, and evaluating candidate investment firms against a mandate's objectives, constraints, and risk tolerances before making a selection recommendation.

A formal document issued to candidate managers specifying the mandate, required data, fee structure, and disclosure items, so that responses can be compared on a consistent basis.

A shorter preliminary inquiry used to gather basic facts about a manager's capabilities, assets, and style before a full search, often to narrow a long list to a short list.

The full set of investment firms or products that could plausibly satisfy a mandate, from which a long list and then a short list are drawn through screening criteria.

Quantitative and qualitative filters such as minimum track record length, assets under management, style purity, and organizational stability used to reduce a manager universe to a workable candidate list.

The small group of candidates, typically three to six, that survive initial screening and receive deeper scrutiny, site visits, and often an invitation to present in person.

An in-person or virtual meeting at which short-listed managers present their process, team, and portfolio to the selection committee and answer detailed questions before a final decision.

The investigative review of a manager's organization, personnel, investment process, risk controls, compliance history, and operations, intended to confirm that reported results are genuine and repeatable.

The portion of due diligence focused on non-investment risks such as custody, valuation, trade processing, cybersecurity, key-person dependency, and business continuity, which can cause losses independent of market performance.

A standardized set of questions covering ownership, staff turnover, investment process, risk management, compliance, and fees, submitted to managers so responses can be documented and compared.

The risk that a manager's results depend heavily on one or a few individuals whose departure, illness, or reduced involvement would materially impair the strategy's future performance.

A gradual shift in a manager's holdings away from the stated investment style, which can leave the client with unintended exposures and make the original benchmark an unreliable measure of performance.

A written document setting out the client's objectives, risk tolerance, constraints, and guidelines, which defines the mandate that any manager search must satisfy and against which results are later appraised.

The table of management and performance fees a manager charges, typically tiered by assets, which must be evaluated alongside gross returns because fees materially reduce the net return the client keeps.

The return remaining after deducting management fees, performance fees, and transaction costs, which is the figure that actually accrues to the client and the fair basis for comparing managers with different fee structures.

The documented history of a manager's returns, typically spanning a full market cycle, used to assess consistency, risk-taking, and whether the stated process has actually been followed.