Risk Metrics

Risk Metrics

Risk metrics Standard deviation is a measure of volatility (how much the price jumps back and forth) Beta is the sensitivity of a stock to the market (1.0 = moves like the market, 2.0 = twice as volatile) Alpha is the income above what beta provides (earnings from skill, not market risk) Sharpe ratio is profit minus risk-free rate / volatility (earnings per unit of risk) Sortino ratio is better than Sharpe, considers only negative volatility (declines) Treynor ratio is excess income / beta (earnings per unit of market risk) Information ratio is alpha / tracking error (earnings from management strategy) Maximum drawdown is the maximum loss from peak to trough (historically) VaR (Value at Risk) is the maximum loss in 95% of cases per day/week (for example, the loss will not exceed 1%) CVaR (Conditional Value at Risk) is the average loss in the worst 5% of cases (stricter than VaR) Tracking error is the deviation of the portfolio from the index (if you copy the S&P 500, it should be small) R-squared is how well beta explains the movements of a stock (>0.7 = good) Correlation is the relationship between two assets (-1 = opposite, 0 = independent, 1 = identical) Covariance is the joint change of two assets (used in MPT) Volatility (implied, historical, realized) is volatility: from option price, from history, actual