SD-09.3 — Performance Appraisal

Business Domain: BD-09 Performance & Analytics (Middle office) · Applies: BOTH

Purpose

Evaluates whether a return was good — judged against the risk taken to earn it. Where SD-09.1 measures the return and SD-09.2 explains where it came from, Performance Appraisal is the third question: was the result skill or luck, and was the risk worth it. It is the discipline of risk-adjusted performance — the realised ratios and statistics that turn a return number into a verdict. The investment-performance body of knowledge treats measurement, attribution and appraisal as the three peer competencies of the discipline (the CFA Institute CIPM curriculum is structured this way); OpenIM models them as three Service Domains for the same reason.

Service Operations

Realised tracking error — the ex-post standard deviation of active return against the benchmark.
Information ratio — active return per unit of realised tracking error.
Realised alpha — the return not explained by benchmark or factor exposure, measured ex-post (Jensen’s alpha; regression / multi-factor alpha).
Total-risk ratios — Sharpe ratio, M-squared (Modigliani risk-adjusted return), and the appraisal ratio.
Systematic-risk ratios — Treynor ratio and beta-relative measures.
Downside-risk ratios — Sortino ratio, Calmar ratio and other measures that penalise only adverse deviation.
Drawdown statistics — maximum drawdown, drawdown duration and recovery period.
Capture ratios — upside and downside capture against the benchmark.
Skill-versus-luck assessment — the statistical-significance test on realised alpha (t-statistic, sample-length adequacy) that distinguishes genuine skill from noise.

Inputs and outputs

Inputs: the portfolio and benchmark return series from SD-09.1; the active-return decomposition from SD-09.2; the contribution-to-risk (ex-post risk decomposition) from SD-09.2, where appraising the risk taken needs the decomposed risk view; the factor model from SD-09.5; the risk-free rate.
Outputs: risk-adjusted performance statistics — consumed by manager monitoring (SD-03.6) and manager selection (BD-03), by GIPS reporting (SD-09.6, which requires ex-post risk measures on composite presentations), and by governance and investor reporting (BD-16).

Entities

Consumes: E-07 Valuation (any method), E-10 Benchmark / Index, E-03 Portfolio / Mandate; E-19 Risk Measurement (any risk_type — risk-adjusted appraisal draws on market, credit, liquidity and other risk measures as relevant to the mandate) where a stored risk result is reused rather than recomputed; the SD-09.1 portfolio and benchmark return series; the SD-09.2 active-return decomposition and the SD-09.2 contribution-to-risk (ex-post risk decomposition); the SD-09.5 factor model.
Owns: none — appraisal results are metrics, defined in the semantic layer (SD-13.8). The open Performance Result entity question noted in SD-09.1 applies: a stored, methodology-versioned appraisal figure would carry audit provenance.

Standards

GIPS — GIPS requires the three-year annualised ex-post standard deviation of the composite and its benchmark on a compliant presentation; that measure is produced here and presented through SD-09.6.
The standard appraisal measures are long-established: Sharpe (1966), Treynor (1965), Jensen’s alpha (1968), M-squared (Modigliani 1997), Sortino. The information ratio and the fundamental law of active management frame the skill-versus-luck assessment.

Open extensions

The boundary with SD-09.2 is settled: both decompositions are SD-09.2’s — return decomposition and ex-post risk decomposition (contribution-to-risk), the risk-side twin built on the same cuts. SD-09.3 measures the realised tracking error and turns it, with the risk-adjusted ratios, into the verdict on whether the risk was worth it; it consumes SD-09.2’s contribution-to-risk to attribute the risk taken, and does not decompose it. (The boundary is stated in the BD-09 README and mirrored on SD-09.2.)
Resolution of the Performance Result entity question (see SD-09.1) — appraisal ratios are methodology-sensitive and audit-relevant.