MEASURES OF RISK AND PERFORMANCE
- Variance, as a symmetrical calculation, is an expected value of the
squared deviations, including both negative and positive deviations
- The semivariance uses a formula otherwise identical to the variance
formula except that it considers only the negative deviations
- Semistandard deviation, sometimes called semideviation, is the
square root of semivariance
- Shortfall risk is simply the probability that the return will be less than
the investor’s target rate of return.
- Target semivariance is similar to semivariance except that target
semivariance substitutes the investor’s target rate of return in place of
the mean return
- Target semistandard deviation (TSSD) is simply the square root of
the target semivariance.
- Tracking error indicates the dispersion of the returns of an
investment relative to a benchmark return, where a benchmark return
is the contemporaneous realized return on an index or peer group of
comparable risk
- Drawdown is defined as the maximum loss in the value of an asset
over a specified time interval and is usually expressed in percentage-
return form rather than currency
- Maximum drawdown is defined as the largest decline over any time
interval within the entire observation period
- Value at risk (VaR) is the loss figure associated with a particular
percentile of a cumulative loss function. In other words, VaR is the
maximum loss over a specified time period within a specified
probability.
- Conditional value-at risk (CVaR), also known as expected tail loss,
is the expected loss of the investor given that the VaR has been
equaled or exceeded.
- A VaR computation assuming normality and using the statistics of the
normal distribution is known as parametric VaR
- Monte Carlo analysis is a type of simulation in which many potential
paths of the future are projected using an assumed model, the results
of which are analyzed as an approximation to the future probability
distributions
- The Sharpe ratio has excess return as its numerator and volatility as
its denominator
- It should be noted that in the field of investments, the term well-
diversified portfolio is traditionally interpreted as any portfolio
containing only trivial amounts of diversifiable risk
- The Treynor ratio has excess return as its numerator and beta as the
measure of risk as its denominator
- The Sortino ratio subtracts a benchmark return, rather than the
riskless rate, from the asset’s return in its numerator and uses
downside standard deviation as the measure of risk in its denominator
- The information ratio has a numerator formed by the difference
between the average return of a portfolio (or other asset) and its
benchmark, and a denominator equal to its tracking error
- Return on VaR (RoVaR) is simply the expected or average return of
an asset divided by a specified VaR
- Jensen’s alpha may be expressed as the difference between its
expected return and the expected return of efficiently priced assets of
similar risk.
- The M2 approach, or M-squared approach, expresses the excess
return of an investment after its risk has been normalized to equal the
risk of the market portfolio
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