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Glossary of Terms
Average Monthly Return - The average monthly return is simply the average historical return for the fund. We measure this over the past 60 months or since the inception date of the fund; whichever is shorter.
Monthly Standard Deviation - Standard Deviation shows the variance of returns around the average return. To you and me, it measures how close and consistently the actual returns are to the average return. A low standard deviation means that over time, the returns were all very close and consistent to the average return. A high standard deviation means that the returns were not at all close to the average and spread across a wide range of returns. In general, a lower standard deviation is preferred to a higher standard deviation.
Monthly Value Add to Benchmark - The monthly value add is a measure of how on average, the fund has performed when compared to its benchmark. If it consistently outperformed the benchmark, the monthly value add would be positive. However, if it consistently underperformed the benchmark, the monthly value add would be negative. In general, a higher Monthly Value Add to the Benchmark is preferred to a lower Monthly Value Add.
Benchmark - This is what an investments return is measured against. For Canadian equity and balanced funds, the benchmark is the TSX 300 Composite Index. For US equity funds, we use the S&P 500 Total Return Index, the Morgan Stanley EAFE is used for international equity and balanced funds, and the Scotia Capital Markets Universe Bond Index is used for fixed income funds.
Tracking Error - The tracking error measures how consistently an investment has performed relative to its benchmark. It is essentially the standard deviation of the monthly value add. Like the standard deviation, a low tracking error means that the investment has consistently outperformed the benchmark whereas a high tracking error means that the investment is not as consistent in its performance. In general a lower tracking error is preferred to a higher tracking error.
Sharpe Ratio – The Sharpe Ratio is a measure of risk adjusted returns. It measures how consistently an investment has generated returns in excess of the risk free rate. It is calculated by taking the fund’s return, subtracting the risk free rate of return, and then dividing this amount by the fund’s standard deviation. In general, a fund with a higher Sharpe Ratio is preferred to a fund with a lower Sharpe Ratio.
Information Ratio - The information ratio helps to compare different investments. This measures how consistently an investment has performed relative to its benchmark. If an investment has a high information ratio, this means that the investment has consistently added return. If it has a low information ratio, it indicates that the investment has added some value, but not consistently. If the information ratio is negative, it indicates that the investment underperformed its benchmark. In general, a higher information ratio is preferred to a lower information ratio.
Alpha – Alpha measures the difference between the investment’s expected return and its actual return given its level of risk as defined by Beta. If the investment has a positive Alpha, then the investment’s performance is higher than expected. If the investment has a negative Alpha, then the performance is less than was expected. In general, an investment with a higher Alpha is preferred to an investment with a lower Alpha.
Beta – Beta measures the volatility of an investment compared to its benchmark. If the investment has a beta greater than 1, the investment’s volatility is higher than the volatility of the benchmark. If the investment has a beta of less than one, then the investment’s volatility is lower than the volatility of the benchmark.
Minimum Monthly Return – This shows what the lowest return for the fund has been during the past 60 months.
Maximum Monthly Return – This shows what the highest return for the fund has been during the past 60 months.
Number of Positive Months – This shows in how many of the past 60 months the fund has posted a return greater than zero.
Chance of a Positive Return – This represents in percentage terms the likelihood of earning a monthly return in excess of zero in the past 60 months. Generally, a higher Chance of a Positive Return is preferred to a lower Chance of a Positive Return.
Number of Negative Months – This shows in how many of the past 60 months the fund has posted a return less than zero.
Chance of a Negative Return – This represents in percentage terms the likelihood of earning a monthly return of less than zero in the past 60 months. Generally, a lower Chance of a Negative Return is preferred over a higher Chance of a Negative Return.
Minimum Monthly Value Add – This figure represents the fund’s worst monthly performance relative to its benchmark in the past 60 months.
Maximum Monthly Value Add – This figure represents the fund’s best monthly performance relative to its benchmark in the past 60 months.
Number of Months in Excess of Index – This number indicates the number of months in the past 60 months that the fund has posted a return that beat its benchmark.
Number of Months Less than Index – This number indicates the number of months in the past 60 months that the fund has posted a return which was less than its benchmark.
Chance of Beating the Index – This represents in percentage terms the likelihood of earning a monthly return in excess of the Benchmark in the past 60 months. Generally, a higher Chance of Beating the Index is preferred to a lower Chance of Beating the Index.
Chance of Not Beating the Index - This represents in percentage terms the likelihood of earning a monthly return which is less than that of the Benchmark in the past 60 months. Generally, a lower Chance of not Beating the Index is preferred to a higher Chance of not Beating the Index.
Correlation – Correlation is a measure of how closely related the movements of a fund are to the movements of another fund or benchmark. Correlation will range between -1 and +1. A correlation of -1, or perfect negative correlation, indicates that the two investments will move directly opposite to each other. A correlation of +1, or perfect positive correlation indicates that the two investments will move exactly the same over time. A correlation of 0 indicates that there is no relationship in the movement of the two investments. In general, investments which have a low correlation to each other offer greater diversification benefits than investments with higher correlations to each other.
No Advice
Our services are intended to be for informational purposes only. The information provided on the Paterson & Associates web site is not intended to constitute legal, accounting, financial or tax advice. Many factors unknown to us may affect the applicability of any statement or comment that we make on our web site to your particular circumstances. You should consult with your professional advisers before acting on any information that we have provided.
Average Monthly Return - The average monthly return is simply the average historical return for the fund. We measure this over the past 60 months or since the inception date of the fund; whichever is shorter.
Monthly Standard Deviation - Standard Deviation shows the variance of returns around the average return. To you and me, it measures how close and consistently the actual returns are to the average return. A low standard deviation means that over time, the returns were all very close and consistent to the average return. A high standard deviation means that the returns were not at all close to the average and spread across a wide range of returns. In general, a lower standard deviation is preferred to a higher standard deviation.
Monthly Value Add to Benchmark - The monthly value add is a measure of how on average, the fund has performed when compared to its benchmark. If it consistently outperformed the benchmark, the monthly value add would be positive. However, if it consistently underperformed the benchmark, the monthly value add would be negative. In general, a higher Monthly Value Add to the Benchmark is preferred to a lower Monthly Value Add.
Benchmark - This is what an investments return is measured against. For Canadian equity and balanced funds, the benchmark is the TSX 300 Composite Index. For US equity funds, we use the S&P 500 Total Return Index, the Morgan Stanley EAFE is used for international equity and balanced funds, and the Scotia Capital Markets Universe Bond Index is used for fixed income funds.
Tracking Error - The tracking error measures how consistently an investment has performed relative to its benchmark. It is essentially the standard deviation of the monthly value add. Like the standard deviation, a low tracking error means that the investment has consistently outperformed the benchmark whereas a high tracking error means that the investment is not as consistent in its performance. In general a lower tracking error is preferred to a higher tracking error.
Sharpe Ratio – The Sharpe Ratio is a measure of risk adjusted returns. It measures how consistently an investment has generated returns in excess of the risk free rate. It is calculated by taking the fund’s return, subtracting the risk free rate of return, and then dividing this amount by the fund’s standard deviation. In general, a fund with a higher Sharpe Ratio is preferred to a fund with a lower Sharpe Ratio.
Information Ratio - The information ratio helps to compare different investments. This measures how consistently an investment has performed relative to its benchmark. If an investment has a high information ratio, this means that the investment has consistently added return. If it has a low information ratio, it indicates that the investment has added some value, but not consistently. If the information ratio is negative, it indicates that the investment underperformed its benchmark. In general, a higher information ratio is preferred to a lower information ratio.
Alpha – Alpha measures the difference between the investment’s expected return and its actual return given its level of risk as defined by Beta. If the investment has a positive Alpha, then the investment’s performance is higher than expected. If the investment has a negative Alpha, then the performance is less than was expected. In general, an investment with a higher Alpha is preferred to an investment with a lower Alpha.
Beta – Beta measures the volatility of an investment compared to its benchmark. If the investment has a beta greater than 1, the investment’s volatility is higher than the volatility of the benchmark. If the investment has a beta of less than one, then the investment’s volatility is lower than the volatility of the benchmark.
Minimum Monthly Return – This shows what the lowest return for the fund has been during the past 60 months.
Maximum Monthly Return – This shows what the highest return for the fund has been during the past 60 months.
Number of Positive Months – This shows in how many of the past 60 months the fund has posted a return greater than zero.
Chance of a Positive Return – This represents in percentage terms the likelihood of earning a monthly return in excess of zero in the past 60 months. Generally, a higher Chance of a Positive Return is preferred to a lower Chance of a Positive Return.
Number of Negative Months – This shows in how many of the past 60 months the fund has posted a return less than zero.
Chance of a Negative Return – This represents in percentage terms the likelihood of earning a monthly return of less than zero in the past 60 months. Generally, a lower Chance of a Negative Return is preferred over a higher Chance of a Negative Return.
Minimum Monthly Value Add – This figure represents the fund’s worst monthly performance relative to its benchmark in the past 60 months.
Maximum Monthly Value Add – This figure represents the fund’s best monthly performance relative to its benchmark in the past 60 months.
Number of Months in Excess of Index – This number indicates the number of months in the past 60 months that the fund has posted a return that beat its benchmark.
Number of Months Less than Index – This number indicates the number of months in the past 60 months that the fund has posted a return which was less than its benchmark.
Chance of Beating the Index – This represents in percentage terms the likelihood of earning a monthly return in excess of the Benchmark in the past 60 months. Generally, a higher Chance of Beating the Index is preferred to a lower Chance of Beating the Index.
Chance of Not Beating the Index - This represents in percentage terms the likelihood of earning a monthly return which is less than that of the Benchmark in the past 60 months. Generally, a lower Chance of not Beating the Index is preferred to a higher Chance of not Beating the Index.
Correlation – Correlation is a measure of how closely related the movements of a fund are to the movements of another fund or benchmark. Correlation will range between -1 and +1. A correlation of -1, or perfect negative correlation, indicates that the two investments will move directly opposite to each other. A correlation of +1, or perfect positive correlation indicates that the two investments will move exactly the same over time. A correlation of 0 indicates that there is no relationship in the movement of the two investments. In general, investments which have a low correlation to each other offer greater diversification benefits than investments with higher correlations to each other.
No Advice
Our services are intended to be for informational purposes only. The information provided on the Paterson & Associates web site is not intended to constitute legal, accounting, financial or tax advice. Many factors unknown to us may affect the applicability of any statement or comment that we make on our web site to your particular circumstances. You should consult with your professional advisers before acting on any information that we have provided.
