Performance Metrics
Performance metrics quantify how well an investment strategy has performed over a given period. These metrics provide the foundation for evaluating returns, comparing strategies, and assessing whether a strategy is meeting its objectives. Understanding the difference between various return measurements is essential for informed investment decision-making.
| Metric | Definition | Interpretation |
|---|---|---|
| Total Return | The sum of all gains/losses and dividends over a specific period as a percentage | Shows how much money you made or lost, including all income, over the entire period |
| Cumulative Return | The total percentage gain or loss from the starting value to the ending value | Measures the full wealth change over the entire holding period; useful for comparing different time horizons |
| Annualized Return | The average return per year, compound annually, over a multi-year period | Normalizes returns across different time horizons; essential for comparing strategies with different holding periods |
| Absolute Return | The actual dollar gain or loss, regardless of market conditions | Focuses on total wealth generation, independent of benchmarks or other strategies |
| Relative Return | The strategy’s return compared to a benchmark (e.g., S&P 500) return | Measures whether the strategy outperformed or underperformed the benchmark; critical for evaluating active management |