Measuring performance

• AnnualisedA return or volatility figure rescaled to a yearly rate, so different periods can be compared.
• BacktestRunning a strategy over historical data to see what it would have done.
• Behaviour gapThe difference between what a fund returned and what its investors actually earned in it.
• BenchmarkThe index or reference portfolio you measure yourself against, to see whether your decisions added anything.
• CAGRThe steady yearly rate that would have turned your starting value into your ending value.
• Calmar ratioAnnualised return divided by the worst drawdown — return per unit of pain.
• Contribution to returnHow many percentage points of the portfolio’s total return one holding was responsible for.
• Equity risk premiumThe extra return investors expect from shares over risk-free government debt, for accepting the risk.
• Information ratioExcess return over a benchmark, divided by tracking error — the consistency of outperformance.
• Look-ahead biasUsing information in a backtest that was not actually available at the time.
• Mark to marketValuing a holding at the price it could be sold for today, rather than what was paid for it.
• Money-weighted returnThe return your actual money earned, counting when each contribution and withdrawal happened.
• Nominal returnReturn measured in currency units, before any adjustment for inflation.
• Out-of-sample testingChecking a strategy on data that was not used to design it.
• OverfittingTuning a strategy so precisely to past data that it captures noise instead of a real effect.
• Performance attributionBreaking a return down into where it actually came from.
• Price returnThe return from price movement alone, ignoring dividends and interest.
• Real returnReturn after subtracting inflation — the only measure of whether you got richer.
• Realised profit and lossGains and losses that have been locked in by selling, as opposed to those still on paper.
• Risk-free rateThe return available with essentially no risk of default, used as the baseline for every other return.
• Sharpe ratioReturn above the risk-free rate, divided by volatility — how much return each unit of risk bought.
• Sortino ratioLike the Sharpe ratio, but dividing only by downside volatility rather than all volatility.
• Survivorship biasThe distortion caused by measuring only the things that made it, and ignoring the ones that failed.
• Time-weighted returnA return that strips out the effect of money you added or withdrew, so it measures the investments alone.
• Total returnThe full return from an investment: price change plus every dividend or interest payment received.
• Tracking differenceThe plain gap between a fund’s return and its index’s return over a period.
• Tracking errorHow much a portfolio’s returns deviate from its benchmark, measured as the volatility of the difference.
• Unrealised profit and lossThe gain or loss on holdings you still own, based on today’s price.
• Yield on costThe dividend a holding pays now, measured against what you originally paid for it rather than what it is worth today.

Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.