What are 'Risk Measures'

Risk measures are statistical measures that are historical predictors of investment risk and volatility, and they are also 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 as compared to its benchmark index.

BREAKING DOWN 'Risk Measures'

There are five principal risk measures, and each measure provides a unique way to assess the risk present in investments that are under consideration. The five measures include the alpha, beta, R-squared, standard deviation and Sharpe ratio. Risk measures can be used individually or together to perform a risk assessment. When comparing two potential investments, it is wise to compare like for like in order to determine which investment holds the most risk.


Alpha measures risk relative to the market or a selected benchmark index. For example, if the S&P 500 has been deemed the benchmark for a particular fund, the activity of the fund would be compared to that experienced by the selected index. If the fund outperforms the benchmark, it is said to have a positive alpha. If the fund falls below the performance of the benchmark, it is considered to have a negative alpha.


Beta measures the volatility or systemic risk of a fund in comparison to the market or the selected benchmark index. A beta of one indicates the fund is expected to move in conjunction with the benchmark. Betas below one are considered less volatile than the benchmark, while those over one are considered more volatile than the benchmark.


R-Squared measures the percentage of an investment's movement that is attributable to movements in its benchmark index. An R-squared value represents the correlation between the examined investment and its associated benchmark. For example, an R-squared value of 95 would be considered to have a high correlation, while an R-squared value of 50 may be considered low. The U.S. Treasury Bill functions as a benchmark for fixed-income securities, while the S&P 500 Index functions as a benchmark for equities.

Standard Deviation

Standard deviation is a method of measuring data dispersion in regards to the mean value of the dataset and provides a measurement regarding an investment’s volatility. As it relates to investments, the standard deviation measures how much return on an investment is deviating from the expected normal or average returns.

Sharpe Ratio

The Sharpe ratio measures performance as adjusted by the associated risks. This is done by removing the rate of return on a risk-free investment, such as a U.S. Treasury Bond, from the experienced rate of return. This is then divided by the associated investment’s standard deviation and serves as an indicator of whether an investment's return is due to wise investing or due to the assumption of excess risk.

  1. Risk Management

    Risk management occurs anytime an investor or fund manager analyzes ...
  2. Volatility

    1. A statistical measure of the dispersion of returns for a given ...
  3. Risk-Adjusted Return

    A risk-adjusted return takes into account the amount of risk ...
  4. Beta

    Beta is a measure of the volatility, or systematic risk, of a ...
  5. Benchmark For Correlation Values

    A benchmark or point of reference chosen by an investment fund ...
  6. Active Return

    Active return is the percentage gain or loss of an investment ...
Related Articles
  1. Investing

    5 Ways To Measure Mutual Fund Risk

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

    PRHSX: Risk Statistics of Health Sciences Mutual Fund

    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.
  3. Investing

    Understanding Volatility Measurements

    How do you choose a fund with an optimal risk-reward combination? We teach you about standard deviation, beta and more!
  4. 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.
  5. Investing

    A Risk Statistics Case Study (PTTRX)

    Analyze the risk metrics of the mutual fund PTTRX. Find out what standard deviation, capture ratios and R-squared indicate about correlation and volatility.
  6. Financial Advisor

    Does Your Investment Manager Measure Up?

    These key stats will reveal whether your advisor is a league leader or a benchwarmer.
  7. Investing

    T Rowe Price Capital Appreciation Fund Risk Statistics Case Study (PRWCX)

    Analyze PRWCX using popular risk metrics that are part of modern portfolio theory (MPT). Explore PRWCX's volatility, correlation and return statistics.
  8. Investing

    Vanguard Mutual Fund With 65% Equity & 35% Bonds (VWELX)

    Explore several risk metrics of VWELX. Learn what beta, R-squared, capture ratios and standard deviation say about volatility and systematic risk for VWELX.
  9. Investing

    Dodge & Cox's High Quality Bonds Mutual Funds (DODIX)

    Learn about the risk metrics of the DODIX Fund. Discover what standard deviation, capture ratios and R-squared indicate about systematic risk and volatility.
  10. Investing

    3 Cases When Beta Does Not Measure Volatility of Stocks

    Examine the theoretical and statistical relationship between beta and volatility to identify three factors that limit beta's explanatory value.
  1. How is correlation used to measure volatility?

    See how the correlation between an asset and its benchmark index can be used as a proxy to determine the relative volatility ... Read Answer >>
  2. What's the relationship between R-squared and beta?

    Learn about the relationship between R-squared and beta. Explore how the concepts are related and often used in conjunction ... Read Answer >>
  3. What's the difference between R-squared and correlation?

    Discover how R-squared calculations determine the practical usefulness of beta and alpha correlations between individual ... Read Answer >>
  4. How is risk aversion measured in Modern Portfolio Theory (MPT)?

    Find out how risk aversion is measured in modern portfolio theory (MPT), how it is reflected in the market and how MPT treats ... Read Answer >>
  5. What metrics should I use to evaluate the risk return tradeoff for a mutual fund?

    Understand the key metrics used to analyze mutual funds and how investors can use each measurement to determine the risk-reward ... Read Answer >>
  6. How can I use alpha in conjunction with the Sharpe Ratio?

    Take a deeper look at the differences between alpha and the Sharpe ratio, two mutual fund performance measures based on modern ... Read Answer >>
Hot Definitions
  1. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  2. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  3. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  4. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  5. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  6. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
Trading Center