Definitions
Monthly Return (Arithmetic Mean): A simple average return (arithmetic mean) that is calculated by summing the returns for each period, and dividing the total by the number of periods. The simple average return does not consider the compounding effect of returns.
Compound Monthly Return (Geometric): The monthly average return that assumes the same return every period that results in the equivalent compound growth rate from the actual return data. The geometric mean is the monthly average return that, if applied each period, would produce a final dollar amount equivalent to the actual final value-added monthly index (VAMI) for that period. (The VAMI reflects the growth of a hypothetical $1,000 in a given investment over time, with the index equal to $1,000 at inception.)
Sharpe Ratio: A measure of a performance histories return relative to its risk. The return (numerator) is defined as the fund's incremental average return over the risk-free rate. The risk (denominator) is defined as the standard deviation of the performance histories returns.
Monthly Standard Deviation: Measures the degree of variation of a performance history around the mean (average) return for a 1-month period. The higher the volatility of the returns, the higher the standard deviation. The standard deviation is used as a measure of investment risk.
Annualized Standard Deviation = Monthly Standard Deviation X ( 12 ) ½
Maximum Drawdown: Measures the loss in any losing period during performance history. It is defined as the percent retrenchment from a peak value to the valley value. The drawdown is in effect from the time the performance histories retrenchment begins until a new fund high is reached. The maximum drawdown encompasses both the period from the peak to the valley (length), and the time from the valley to a new fund high (recovery). It measures the largest percentage drawdown that has occurred in any data record.
Annualized Alpha: Measures the performance histories value added relative to a benchmark. It is the Y intercept of the regression line.
Beta: Represents the slope of the regression line. Beta measures a risk relative to the market as a whole (i.e., the ."market." can be any index or investment). Beta describes the sensitivity to broad market movements. For example, for equities, the stock market is the independent variable and has a beta of 1. A fund with a beta of 0.5 will participate in broad market moves, but only half as much as the market overall.