CIC Study Guide 2026

The Sharpe Ratio divides a portfolio's excess return (above the risk-free rate) by its standard deviation, measuring reward per unit of total risk.

Gross Domestic Product (GDP) is the total monetary value of all finished goods and services produced within a country's borders in a specific time period. It serves as a comprehensive measure of a nation's economic activity and health. A rising GDP generally indicates economic growth, while a declining GDP can signal a recession.

Active management is an investment strategy where portfolio managers make specific investment decisions, such as stock picking and market timing, with the goal of outperforming a specific market benchmark or index. This approach involves extensive research and analysis to identify undervalued assets or anticipate market trends. In contrast, passive management aims to replicate the performance of a benchmark.

Diversification is the strategy of spreading investments across various asset classes, industries, and geographies to minimize exposure to any single risk. By not putting all "eggs in one basket," the negative performance of one investment can be offset by the positive performance of another. This helps to reduce overall portfolio volatility and mitigate specific (unsystematic) risks without necessarily sacrificing returns.

Active return (also called excess return or alpha in the attribution context) is simply the portfolio's return minus the benchmark's return, representing the value added or subtracted by active management.

When two assets are perfectly positively correlated (ρ = +1), there is no diversification benefit and portfolio standard deviation equals the weighted average of the individual standard deviations.