 # Performance & Risk Metrics BullGlobe

## Performance & Risk Metrics

### What does investment performance mean?

In the investment world, performance is essentially translated to returns (gains or losses) on your investment and the progress of those returns over time.

#### Downside Deviation

Downside deviation is a measure of downside risk that focuses on returns that fall below a minimum threshold or minimum acceptable return (MAR). It is used in the calculation of the Sortino ratio, a measure of risk-adjusted return. The Sortino ratio is like the Sharpe ratio, except that it replaces the standard deviation with the downside deviation.

#### Sharpe Ratio

The Sharpe Ratio is ultimately a measure of expected return (in excess of any riskless returns) per unit of risk; hence we call it a measure of risk-adjusted returns. Therefore, the higher the Sharpe ratio the better, as higher returns will be generated for a relatively low amount of risk. Generally, a Sharpe ratio below 1.0 is considered low, 1.0 or above is good and 2.0 or above is very good.

#### Sortino Ratio

The Sortino Ratio is a modification of the Sharpe ratio. The standard deviation accounts for both positive (upside) and negative (downside) volatility; and since the Sharpe ratio uses the standard deviation as a proxy for risk, it makes no distinction between “good” and “bad” volatility.

Therefore, the Sortino Ratio fixes this issue by only focusing on the negative (downside) volatility. It uses the standard deviation of only those returns that fall under a predetermined, acceptable return target. That is why it is useful for investors to determine the rate of return needed to reach a specific financial goal. Generally, that acceptable return target is set to 0% in order to encompass all negative returns; however, investors often use whatever their MAR (minimum acceptable return) maybe—think of it as the minimum return investors will accept, their threshold.

#### Treynor Ratio

The Treynor Ratio, also known as the reward-to-volatility ratio, is a performance metric for determining how much excess return was generated for each unit of risk taken on by a portfolio. Excess return in this sense refers to the return earned above the return that could have been earned in a risk-free investment. Although there is no true risk-free investment, treasury bills are often used to represent the risk-free return in the Treynor ratio.

#### Beta

Beta is another volatility measure commonly used to compare an asset’s (or strategy’s) volatility to the risk of the broader market (systematic risk). In other words, if a specific asset or a strategy has higher swings (it is more volatile) than its broader market, its beta will be higher than 1.0; and if it moves less than its broader market, it will have a beta below 1.0. Therefore, if an asset has a beta of 1.5, it will theoretically be more volatile than its market, with higher expected returns but with higher intrinsic risks.

An asset’s broader market refers to the stock market which the asset belongs to. Generally, a market’s index is used as a proxy for the broader market (benchmark); for instance, the S&P500 Index can be used as a proxy for the US market, or the STOXX Europe 600 can represent the European market.

The beta coefficient is a statistical measure that represents the slope of the regression line plotted by inputting an asset’s returns against its market’s. It is also a component of the CAPM (Capital Asset Pricing Model), which intends to assess the return investors can expect to receive based on volatility. We will look into regression and the CAPM in future segments.

#### Kurtosis

Kurtosis measures the spread of the returns in a histogram. Higher kurtosis implies our returns are likely to be more extreme, as outliers (extreme returns, positive or negative) happen often.

The normal kurtosis is 3.0; so, any number higher than that indicates that our return distribution has heavier tails and vice versa (tails are the positive and negative extremes of the data, and heavier or lighter tails refers to a high or low amount of extreme returns).

From our histogram example below, we can easily find an outlier, we had one return that was between 2% and 2.5%. We found that the kurtosis in the above example is 0.85, which means that our returns are not very spread-out and there may be a low risk of seeing many extreme returns.

#### Skewness

Skewness represents the level of symmetry of your returns in a histogram, or more accurately, the lack of symmetry. A histogram is symmetric if it looks the same to the left and right of the center point (which is the average return).

The skewness of a normal distribution is 0; so, if we have a skewness that is higher than 0, we say that our returns are skewed to the right. This means that the right tail is longer than the left tail, and we are likely to see a few very high returns, but a lot of small losses. Conversely, having a negative skewness means that your left tail will be longer than your right, which implies that you are likely to see a few big losses, but many small gains.

## Efficient Frontier Line

Asset correlation Asset correlation is a measure of how investments move relative to one another. When assets move in the same direction at the same time, they are considered to be positively correlated. When one asset tends to move up when the other goes down, the two assets are considered...

## Correlation Matrix

Asset correlation Asset correlation is a measure of how investments move relative to one another. When assets move in the same direction at the same time, they are considered to be positively correlated. When one asset tends to move up when the other goes down, the two assets are considered...

## Value At Risk (VaR)

Value at Risk (VaR) Value at Risk (or VaR) is a measure that is used to statistically quantify the level of risk of a certain investment over a specific period of time. It essentially estimates the potential losses you may encounter in a given timeframe (days, months, years, etc.) for...

## Historical Drawdown

Drawdown Drawdown is a measure of downside risk. It is a simple metric that tells us (on a percentage basis) how much an investment declined from its peak (its highest value) to its trough (its lowest value). By analyzing an asset’s drawdown history we can see how it has been affected by economic...

## Volatility Histogram

Histogram of returns A histogram is a type of graph that plots the frequency distribution of your returns. In simpler words, it captures the frequency (number of times) in which certain returns happen and it separates them into different buckets (bins or ranges). Let’s build a quick example in order...

## Asset Summary

The Portfolio Asset Summary is a table that shows some basic key information about each asset in your portfolio. Assets The first column shows the name of every asset in your portfolio. If you look up these names online, you may find tons of additional information about them. Tickers The...

## Performance & Risk Metrics

What does investment performance mean? In the investment world, performance is essentially translated to returns (gains or losses) on your investment and the progress of those returns over time. Beginning Balance The Beginning Balance is the money you started investing with. In our portfolios, we set a hypothetical beginning balance...

## Yearly Performance

Looking at the period-over-period performance of an investment can also be helpful to detect longer-term trends. It is calculated similarly to the cumulative performance; however, in this case, we do not use the initial value as the base for the returns, we look at each period individually and compute the percentage change...  Scroll to Top ### discover the finance world 