The following terms are also useful in understanding the measures of portfolio returns and risks:

  • Risk premium- The risk premium is the higher return that is expected for taking on the greater risk associated with investing in a growth stock versus a stock from a more established company.
     
  • Expected return - Since the expected return is the average of the probability of possible rates of return, it is by no means a guaranteed rate of return. However, it can be used to forecast the future value of a portfolio and provides a guide from which to measure actual returns. It is an integral component of the capital asset pricing model, which calculates the expected return based on the premium of the market rate over the risk-free return as well as the risk of the investment relative to the market as a whole (beta).
     
  • Benchmark portfolios - A common way to evaluate portfolio returns is to compare them to a benchmark such as an index. These are the most common benchmarks:


Bond Yields

Related Articles
  1. Investing

    How to Use a Benchmark to Evaluate a Portfolio

    What is an investment benchmark and how is it used to evaluate the risk and return in a portfolio.
  2. Investing

    How to Calculate Risk Premium

    Think of a risk premium as a form of hazard pay for risky investments.
  3. Financial Advisor

    Measure Your Portfolio's Performance

    Learn three ratios that will help you evaluate your investment returns.
  4. Investing

    What are Excess Returns?

    Excess returns are investment returns that exceed a benchmark or index with similar risk.
  5. Investing

    Understanding Market Risk Premium

    Market risk premium is equal to the expected return on an investment minus the risk-free rate. The risk-free rate is the minimum rate investors could expect to receive on an investment if it ...
  6. Investing

    Calculating the Equity Risk Premium

    Equity risk premium is the excess expected return of a stock, or the stock market as a whole, over the risk-free rate.
  7. Investing

    The Capital Asset Pricing Model: an Overview

    CAPM helps you determine what return you deserve for putting your money at risk.
  8. Investing

    How to Select and Build a Benchmark to Measure Portfolio Performance

    How to select and build a benchmark to measure the performance of your investment portfolio
  9. Investing

    How Investment Risk Is Quantified

    FInancial advisors and wealth management firms use a variety of tools based in Modern portfolio theory to quantify investment risk.
  10. Investing

    What's a Benchmark?

    A benchmark is a standard investors choose to gauge the performance of their portfolios.
Frequently Asked Questions
  1. What is considered a healthy operating profit margin?

    Operating profit margin is one of the key profitability ratios that investors and analysts consider when evaluating a company. ...
  2. What is the difference between preference and ordinary shares?

    Preference shares, or preferred shares, have the advantage of a higher priority claim to the assets of a corporation in case ...
  3. What's the difference between "top-down" and "bottom-up" investing?

    Top-down investing looks at the economy and tries to forecast which industry will generate the best returns. A bottom-up ...
  4. Why is business ethics important?

    No matter the size, industry or level of profitability of an organization, business ethics are one of the most important ...
Trading Center