Risk

17 concepts in this category.

• Value at Risk (VaR 95%)

  VaR 95% says: 'On 95% of days, you won't lose more than X.' If your portfolio's daily VaR is $1,000, there's only a 5% chance of losing more than $1,000 in a single day.

• CVaR (Conditional VaR)

  While VaR says 'you won't lose more than X on 95% of days,' CVaR asks 'but on those worst 5% of days, how much do you lose on average?' If VaR is $1,000, CVaR might show the average loss in that worst 5% is actually $1,800 — a fuller picture of how bad the bad days really get.

• Sharpe Ratio

  Sharpe ratio measures how much return you get for every unit of risk you take. A Sharpe of 1.0 means for every 1% of risk, you earn 1% return above the risk-free rate. Higher is better.

• Sortino Ratio

  Sharpe ratio penalizes all volatility, even upside gains. Sortino only penalizes bad volatility (downside). A fund that has big gains but small losses looks better on Sortino than Sharpe.

• Calmar Ratio

  Calmar asks how much return you earned per dollar of maximum pain. If a portfolio returned 15% annually over the period measured but suffered a 30% drop from peak to trough at its worst point, the Calmar ratio is 0.5 — half a percent of return for every percent of that worst loss.

• Maximum Drawdown

  If your portfolio hit $10,000 then fell to $6,000 before recovering, the max drawdown is 40%. It measures the worst experience a real investor would have endured.

• Beta

  Beta of 1.0 means the stock moves in line with the market. Beta of 1.5 means if the market rises 10%, this stock typically rises 15% — more volatile. Beta of 0.5 means less volatile than the market.

• Alpha

  Alpha is the extra return a fund earns above what you'd expect given its risk. If the market returns 10% and your fund returns 13% with the same risk, alpha is 3%. Positive alpha = the manager adds value.

• Treynor Ratio

  Like Sharpe ratio but uses beta (market risk) instead of total volatility. If two portfolios have the same Sharpe but different betas, Treynor reveals which one is more efficient at using market exposure.

• Information Ratio

  If a manager beats the market by 2% per year on average, but the outperformance swings wildly (+10%, -6%, +2%...), the information ratio is low. Higher IR means consistent, reliable outperformance.

• Tracking Error

  If your portfolio closely mirrors the index, tracking error is low. If you make big independent bets, it's high. Index funds have near-zero tracking error. Active funds that differ from the benchmark have high tracking error.

• Downside Deviation

  Unlike regular volatility, which counts every swing up or down, downside deviation only measures the bad ones. A fund that swings wildly on good days but rarely loses money will show high standard deviation but low downside deviation — it isolates the risk of actually losing money.

• Ulcer Index

  Named because large, long drawdowns cause stress (ulcers). It penalizes both deep drops AND slow recoveries. A fund that drops 20% and takes 2 years to recover scores much worse than one that drops 20% and recovers in 2 months.

• Annualised Volatility

  Volatility tells you how bumpy the ride is. If two investments both returned 10% in a year, but one went up and down wildly while the other climbed steadily, the wild one has higher volatility. It's like comparing a roller coaster to a gentle hill — both get you to the same height, but the experience is very different.

• Portfolio Volatility

  Portfolio volatility measures how much your combined investments bounce around. Unlike individual stock volatility, it accounts for diversification — when some holdings go up while others go down, they partially cancel out, reducing overall portfolio risk.

• R-Squared (R²)

  R-squared tells you how much your portfolio moves in sync with the overall market. An R² of 0.95 means 95% of your portfolio's ups and downs are explained by the market. A low R² means your returns come from other factors — which can be good (alpha) or risky (concentrated bets).

• Stress Test Scenarios

  Stress tests answer: 'What if 2008 happened again?' They replay historical market crashes on your current portfolio to show how much you could lose. Think of it as a fire drill for your investments — it helps you prepare for the worst before it happens.