Technical Risk Rations Flashcards
What are the 5 technical risk ratios?
Alpha, Beta, Standard Deviation, Sharpe ratio, R-Squared
Alpha
alpha represents the performance of a portfolio relative to a benchmark or market index
Beta
Beta determines the volatility of an asset or portfolio in relation to the overall market. The overall market has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market.
R-Squared
measures the broad market’s overall volatility or risk, known as systematic market risk.
Modern Portfolio Theory
A practical method for selecting investments in order to maximize their overall returns within an acceptable level of risk.
Sharpe Ratio
compares the return of an investment with its risk (risk adjusted performance compared to the return of a risk free asset)
Efficient Market Hypothesis
market prices incorporate all available information at all times, and so securities are always properly priced (the market is efficient.)
Why is Alpha used
alpha in diversified portfolios, with diversification intended to eliminate unsystematic risk. It can be added or subtracted from a funds return
Standard Deviation
Measures the dispersion of a dataset relative to its mean. It’s often used as a measure of a relative riskiness of an asset.
Standard deviation of a volatile stock is
High- the data observed is quite spread out.
Standard deviation of a stable, blue chip stock is
Low
The mean
Adding all the data points and dividing them by the number of data points.
Calculate range
the highest value minus the lowest value
The market has a beta of
1
What is a good Sharpe Ratio?
Sharpe ratios above 1 are generally considered “good,” offering excess returns relative to volatility.
