Financial Ratios Investment Ratio | A 1 Page Guide to Ratios

Financial Ratios Investment Ratio

Financial Ratios Investment Ratio | 1 Page Guide

Average Return
The arithmetic average. These returns are appropriate for expectational purposes, such as asset allocation inputs.

Average Excess Returns
The arithmetic average of the portfolio return minus the benchmark return. If and only if the portfolio beta is 1.0 or assumed to be 1.0, then the average excess return will equal Jensen Alpha or average risk adjusted excess return.

Cumulative Return
The cumulative return or the growth of a dollar over the time period specified. Note the cumulative return picture obtained often depends on the beginning date for calculation. The choice of the initial time point can often lead to different conclusions.

Excess Return/Risk
The ratio of return in excess of the benchmark divided by the standard deviation of the portfolio. If the beta is 1.0, this measure is analogous the appraisal ratio.

Sharpe Ratio
The ratio of annualized return minus the annualized risk-free rate divided by the annualized standard deviation of the portfolio minus the annualized standard deviation of the risk-free rate. It is a measure of the risk to return trade-off.

Treynor Ratio
The ratio of average return minus the average risk-free rate divided by the beta of the portfolio. It is a measure of the risk to return trade-off using beta instead of standard deviation.

Sortino Ratio
The ratio of average return minus the average risk-free rate divided by the downside semi-standard deviation of the portfolio. It is a measure of the risk to return trade-off suitable when the returns are not normally distributed. It does not penalize the return for good or positive variation.

Jensen Alpha
The abnormal return or the risk adjusted excess return. It is the most widely used measure of the risk to return trade-off.

Appraisal Ratio
The ratio of risk adjusted excess return to diversifiable risk. It is the ratio of alpha to standard error. It is a measure of the additional return a portfolio offers relative to the increase in tracking error around a benchmark.

Frequency Up/Down
The number of times the portfolio return was above (up) and below (down) the cut-off point, zero.

Percentage Up/Down
The percentage of time that the portfolio is above (up) and below (down) the cut-off point, zero.

Average Return
The average return when the portfolio is above (up) and below (down).

For over 1,000 additional terms and definitions please see our Investment Glossary Guide.

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