What Are Risk Measures?

Risk measures are statistical measures that are historical predictors of investment risk and volatility, and they are also major components in 澳洲幸运5开奖号码历史查询:modern portfolio theory (MPT). MPT is a standard financial and academic methodology for assessing the performance of a stock or a stock fund as compared to its 澳洲幸运5开奖号码历史查询:benchmark index.

Types of Risk Measures

There are five principal risk measures, and each measure provides a unique way to assess the risk present in investments that are under consideration. The five measures include alpha, beta, R-squared, standard deviation, and the Sharpe ratio. 澳洲幸运5开奖号码历史查询:Risk measures can be u♐sed individually or t🌳ogether to perform a risk assessment. When comparing two potential investments, it is wise to compare similar ones to determine which investment holds the most risk.

Alpha

Alpha measures risk relative to the market or a selected benchmark index. For example, if the S&P 500 has been deemed the benchmark for a particular fund, the activity of the fund would be compared to that experienced✱ by the selected index. If the fund outperforms the benchmark, it is said to have a positive alpha. If the fund falls below the performance of the benchmark, it is consid♌ered to have a negative alpha.

Beta

Beta measures the volatility or 澳洲幸运5开奖号码历史查询:systematic risk of a fund in comparison to the market or the selected benchmark index. A beta of one indicates the fund is expected to move in conjunction with the benchmark. 澳▨洲幸运5开奖号码历史查询:Betas below one are considered less volatile than the benchmark, 🥂while those over one are considered more volatile than the benchmark.

R-Squared

澳洲幸运5开奖号码历史查询:R-Squared measures the percentage of an investment's movement attribut🀅able to movements in its benchmark index. An R-squared value represents the correlation between the examined investment and its associated benchmark. For example, an R-squared value of 95 would be considered to have a high correlation, while an R-squared value of 50 may be considered low.

The U.S. Treasury Bill functions as a benchmark for fixed-income securities, while the S&P 500 Index functions as a benchmark for equities.

Standard Deviation

Standard deviation is a method of measuring data dispersion in rega🌜rds to the mean value o🌱f the dataset and provides a measurement regarding an investment’s volatility.

As it relates to invest♔ments, the standard deviation measures how much return on investment i♑s deviating from the expected normal or average returns.

Sharpe Ratio

The 澳洲幸运5开奖号码历史查询:Sharpe ratio measures performance as adjusted by the associated risks. This is done by removing the rate of return on a risk-free investment, such as a U.S. Trea💝sury🎐 Bond, from the experienced rate of return.

This is then divided by the associated investment’s standard deviation and serves as an indicator of whether an investment's return is due to wise investing or due to the assumption of excess risk.

The Bottom Line

Trading and investing are difficult. Picking the right stocks or assets can be complex and it is hard to know the right time to buy a stock and when to sell it. There are many metrics out there that can help make a decision, particular🃏ly those assessing risk. Utilizing the above metrics can 🐟greatly assist investors in making the right investment choices.

Correction—April 17, 2024: This arti🔯cle has been corrected to state that Beta measures systematic risk.