Risk Measures

What are 'Risk Measures'

Risk measures are statistical measures that are historical predictors of investment risk and volatility and major components in modern portfolio theory (MPT). MPT is a standard financial and academic methodology for assessing the performance of a stock or a stock fund compared to its benchmark index.

BREAKING DOWN 'Risk Measures'

There are five principal risk measures:

Alpha: Measures risk relative to the market or benchmark index
Beta: Measures volatility or systemic risk compared to the market or the benchmark index
R-Squared: Measures the percentage of an investment's movement that are attributable to movements in its benchmark index
Standard Deviation: Measures how much return on an investment is deviating from the expected normal or average returns
Sharpe Ratio: An indicator of whether an investment's return is due to smart investing decisions or a result of excess risk.

Each risk measure is unique in how it measures risk. When comparing two or more potential investments, an investor should always compare the same risk measures to each different potential investment to get a relative performance.

RELATED TERMS
  1. Active Risk

    A type of risk that a fund or managed portfolio creates as it ...
  2. Modern Portfolio Theory - MPT

    A theory on how risk-averse investors can construct portfolios ...
  3. Active Return

    The percentage gain or loss of an investment relative to the ...
  4. Appraisal Ratio

    A ratio used to measure the quality of a fund's investment picking ...
  5. Volatility

    1. A statistical measure of the dispersion of returns for a given ...
  6. Post-Modern Portfolio Theory - ...

    A portfolio optimization methodology that uses the downside risk ...
Related Articles
  1. ETFs & Mutual Funds

    5 Ways To Measure Mutual Fund Risk

    These statistical measurements highlight how to mitigate risk and increase rewards.
  2. 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.
  3. Trading

    Modern Portfolio Theory: Why It's Still Hip

    See why investors today still follow this old set of principles that reduce risk and increase returns through diversification.
  4. ETFs & Mutual Funds

    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.
  5. Investing

    Understanding Modern Portfolio Theory

    Modern portfolio theory describes ways of diversifying assets in a portfolio in order to maximize the expected return given the owner’s risk tolerance.
  6. ETFs & Mutual Funds

    Benchmark To Show Winning Returns

    You can't win if you don't keep score. Read on to learn how to measure your returns.
  7. Managing Wealth

    R-Squared

    Learn more about this statistical measurement used to represent movement between a security and its benchmark.
  8. ETFs & Mutual Funds

    Understanding Volatility Measurements

    How do you choose a fund with an optimal risk-reward combination? We teach you about standard deviation, beta and more!
  9. Managing Wealth

    Redefining Investor Risk

    Changing the way you think about time and risk can change the way you invest.
  10. Managing Wealth

    Using Normal Distribution Formula To Optimize Your Portfolio

    Normal or bell curve distribution can be used in portfolio theory to help portfolio managers maximize return and minimize risk.
RELATED FAQS
  1. Where did Modern Portfolio Theory (MPT) come from?

    Learn about modern portfolio theory, or MPT, and its origins. MPT has become a standard paradigm through which investors ... Read Answer >>
  2. How do investment advisors calculate how much diversification their portfolios need?

    Learn how modern portfolio theory (MPT) can help determine a diversified mix of assets for inclusion in a portfolio that ... Read Answer >>
  3. How is portfolio variance reduced in Modern Portfolio Theory?

    Learn about modern portfolio theory, specifically what it asserts about asset allocation and managing portfolio risk through ... Read Answer >>
  4. What is the difference between the Sharpe ratio and alpha?

    Use alpha and the Sharpe ratio to evaluate mutual funds by comparing their risk-adjusted returns. Learn what modern portfolio ... Read Answer >>
  5. What types of assets lower portfolio variance?

    Learn what type of assets reduce portfolio variance and how modern portfolio theory uses correlation coefficients. Read Answer >>
  6. How is standard deviation used to determine risk?

    Understand the basics of calculation and interpretation of standard deviation and how it is used to measure risk in the investment ... Read Answer >>
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center