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RISK MEASURES GUIDE
Risk Measures Guide v15.0
Risk Measures Guide
As of Version 15 of Albridge Wealth Reporting (AWR) contains the integration of risk measures
and new reports designed to deliver risk analysis on your client’s portfolios.
Two types of risk measures are incorporated into AWR:
ROR risk measures are rates of return that appear in risk reports. They are one singe
rate of return over the whole reporting period.
Sampling Based risk measures rely on a sampling of many sub-period rates of return
during the reporting period.
ROR “Risk” Measures
Risk-Free Rate -The theoretical rate of return of an investment with zero risk. The riskfree rate represents the return an investor would expect from a risk-free investment over
a specified period of time. Like any ROR it will be annualized if over 365 days.
Available Risk - Free Rates include the Consumer Price Index, Citigroup 3-month CD,
Citigroup Investment-Grade Bond 1-month CD, Citigroup Broad Investment-Grade Bond
3-month T-Bill, Lehman Brothers U.S. TIPS, and the Merrill Lynch 90-day Treasury Bill.
Excess Return - Rate of returns in excess of the risk-free rate or in excess of a market
measure, such as an index fund. In other words, when you have excess returns you are
making more money than if you put your money into an index fund like the S&P 500
Index Fund.
Benchmark Return -The Benchmark Return is the ROR on the benchmark over the
period. If the time period is longer than 365 days the ROR’s will be annualized.
Benchmark Excess Return -The Benchmark Excess Return is the Benchmark Return
over the time period minus the Risk-Free Rate over the same time period. If the time
period is longer than 365 days both return numbers will be annualized before the
subtraction is performed.
ROR Over Benchmark -The ROR Over Benchmark is defined as the ROR of the entity
being analyzed (i.e. the portfolio, account, manager, or asset) over the time period minus
the ROR of the benchmark over the same period. If the time period is longer than 365
days both ROR’s will be annualized and then the subtraction performed.
Sampling Based Risk Measures
Alpha/Jensen’s Alpha - Used to determine the excess return of a security or portfolio of
securities over the security's theoretical expected return as determined by the CAPM
(Capital Asset Pricing Model).
Beta - This is a measure of the volatility, or systematic risk, of a security or a portfolio in
comparison to the market as a whole. A beta of 1 indicates that the security's price will
move with the market. A beta of less than 1 means that the security will be less volatile
than the market. A beta of greater than 1 indicates that the security's price will be more
volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more
volatile than the market.
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Standard Deviation - A measure of the dispersion of monthly returns to measure an
investment’s volatility. A low standard deviation indicates that all of the data points are
very close to the same value (the mean); while high standard deviation indicates that the
data is “spread out” over a large range of values (higher volatility).
Mean -The simple mathematical average of the monthly returns during the period. The
number is converted from a monthly return into an equivalent annual return.
Sharpe Ratio - Measures risk-adjusted performance. The Sharpe Ratio is calculated by
subtracting the risk-free rate – such as that of the 10-year U.S. Treasury bond – from the
rate of return for a portfolio and dividing the result by the standard deviation of the
portfolio returns. The Sharpe Ratio tells us whether a portfolio's returns are due to smart
investment decisions or a result of excess risk. This measurement is very useful
because although one portfolio or fund can reap higher returns than its peers, it is only a
good investment if those higher returns do not come with too much additional risk. The
greater a portfolio's Sharpe Ratio, the better its risk-adjusted performance has been. A
negative Sharpe Ratio indicates that a risk-less asset would perform better than the
security being analyzed.
R-Squared -This measure is a statistical measure that represents the percentage of a
fund or security's movements that can be explained by movements in a benchmark
index. R-Squared values range from 0 to 100. An R-Squared of 100 means that all
movements of a security are completely explained by movements in the index. A high RSquared (between 85 and 100) indicates the fund's performance patterns have been in
line with the index. A fund with a low R-Squared (70 or less) doesn't act much like the
index.
Up-Market Capture Ratio - The Up-Market capture ratio is a measure of a manager's
performance in up markets relative to the index during the same period. A ratio value of
115 indicates that the manager has outperformed the market index by 15% in periods
when the index has risen (higher is better).
Down-Market Capture Ratio -This ratio is the direct opposite of the Up-Market Capture
ratio, gauging performance of the manager relative to the index in down markets. A ratio
value of 80 would indicate the manager has declined only 80% as much as the declining
overall market, indicating relative outperformance (lower is better).
Risk-Adjusted Return - A concept that refines an investment's return by measuring how
much risk is involved in producing that return, which is generally expressed as a number
or rating (higher is better).
Tracking Error - This is a divergence between the price behavior of a position or a
portfolio and the price behavior of a benchmark. This is often in the context of a hedge or
mutual fund that did not work as effectively as intended, creating an unexpected profit or
loss instead. Tracking errors are reported as a "standard deviation percentage"
difference. This measure reports the difference between the return you received and that
of the benchmark you were trying to imitate.
Value at Risk - This measure is a technique used to estimate the probability of portfolio
losses based on the statistical analysis of historical price trends and volatilities.
Sortino Ratio - A ratio developed to differentiate between good and bad volatility in the
Sharpe Ratio. This differentiation of upwards and downwards volatility allows the
calculation to provide a risk-adjusted measure of a security or fund's performance without
penalizing it for upward price changes (higher is better).
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Information Ratio - This measure is ratio of portfolio returns above the returns of a
benchmark (usually an index) to the volatility of those returns. The Information Ratio (IR)
measures a portfolio manager's ability to generate excess returns relative to a
benchmark, but also attempts to identify the consistency of the investor. A high IR can
be achieved by having a high return in the portfolio, a low return of the index and a low
tracking error.
Treynor Ratio - This measure is a risk-adjusted measure of return based on systematic
risk. It is similar to the Sharpe Ratio, with the difference being that the Treynor Ratio uses
beta as the measurement of volatility. Also known as the “reward-to-volatility ratio”.
Regression Alpha - A measure of the “value added” that the individual making the
investment decisions contributes. Regression Alpha shows the amount of return the
manager adds that is not explained due to additional risk.
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