
Portfolio Risks  Measuring Portfolio Risks
One of the concepts used in risk and return calculations is standard deviation, which measures the dispersion of actual returns around the expected return of an investment. Since standard deviation is the square root of the variance, variance is another crucial concept to know. The variance is calculated by weighting each possible dispersion by its relative probability (take the difference between the actual return and the expected return, then square the number).
The standard deviation of an investment's expected return is considered a basic measure of risk. If two potential investments had the same expected return, the one with the lower standard deviation would be considered to have less potential risk.
Risk measures
There are three other risk measures used to predict volatility and return:

Beta  This measures stock price volatility based solely on general market movements. Typically, the market as a whole is assigned a beta of 1.0. So, a stock or a portfolio with a beta higher than 1.0 is predicted to have a higher risk and, potentially, a higher return than the market. Conversely, if a stock (or fund) had a beta of .85, this would indicate that if the market increased by 10%, this stock (or fund) would likely return only 8.5%. However, if the market dropped 10%, this stock would likely drop only 8.5%.
Learn how to properly use this measure to help you meet your criteria for risk within the article Beta: Gauging Price Fluctuations.
Â  Alpha  This measures stock price volatility based on the specific characteristics of the particular security. As with beta, the higher the number, the higher the risk.
Alpha = [(sum of y)  ((b)(sum of x))]Ã·n
Where:
n = number of observations (36 months)
b = beta of the fund
x = rate of return for the market
y = rate of return for the fund
An alpha of 1.0 means the fund outperformed the market 1%.
 Sharpe ratio  This is a more complex measure that uses the standard deviation of a stock or portfolio to measure volatility. This calculation measures the incremental reward of assuming incremental risk. The larger the Sharpe ratio, the greater the potential return.
Sharpe Ratio = (total return  risk free rate of return)
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Look Out!
The reverse of "the larger the Sharpe ratio, the greater the return" also holds true. The "lower the Sharpe ratio, the lower the potential return". If a security\'s Sharpe ratio were equal to "0", there would be no reward for taking on the higher risk, and the investor would be better off simply holding Treasuries (whose return is equal to the riskfree return component of the equation).

Mutual Funds & ETFs
5 Ways To Measure Mutual Fund Risk
These statistical measurements highlight how to mitigate risk and increase rewards. 
Fundamental Analysis
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. 
Term
Evaluating Alpha and Beta
Alpha and beta are risk ratios that investors use to calculate, compare and predict returns. 
Investing Basics
Alpha and Beta for Beginners
An indepth look at what alpha and beta are and what they measure. 
Bonds & Fixed Income
Find The Highest Returns With The Sharpe Ratio
Learn how to follow the efficient frontier to increase your chances of successful investing. 
Investing
Measure Your Portfolio's Performance
Learn three ratios that will help you evaluate your investment returns. 
Fundamental Analysis
Quantitative Analysis Of Hedge Funds
Hedge fund analysis requires more than just the metrics used to analyze mutual funds. 
Mutual Funds & ETFs
PRHSX: T. Rowe Price Health Sciences Fund Risk Statistics Case Study
Examine the risk metric of the T. Rowe Price Health Sciences Fund. Analyze beta, capture ratios and standard deviation to assess volatility and systematic risk. 
Options & Futures
Bettering Your Portfolio With Alpha And Beta
Increase your returns by creating the right balance of both these risk measures. 
Investing Basics
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.

Sharpe Ratio
The Sharpe Ratio is a measure for calculating riskadjusted return, ... 
RiskAdjusted Return
A concept that refines an investment's return by measuring how ... 
Beta
Beta is a measure of the volatility, or systematic risk, of a ... 
Portable Alpha
A strategy in which portfolio managers separate alpha from beta ... 
Volatility
1. A statistical measure of the dispersion of returns for a given ... 
Standard Deviation
1. A measure of the dispersion of a set of data from its mean. ...

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