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RISK METRICS FOR INVESTORS & TRADERS

RISK METRICS FOR INVESTORS & TRADERS

Before we can really start to make granular portfolio decisions we first need to consider our risk constraints. When you go and speak with advisors they can give you some good advice but often it’s too generalized. Like your portfolio, construction should be aggressive, moderate, or conservative. In high-level portfolio construction, you have to set constraints around specific metrics. The two main risk metrics that I look at are Drawdown and standard deviation. 

STANDARD DEVIATION

Standard deviation looks at how much the returns of a specific asset or fund deviate from the average. Universal risk management metric. Want to make sure that the standard deviation of your portfolio is never higher than the returns of the portfolio. This will translate to very low risk-adjusted returns. 

PORTFOLIO DRAWDOWN

More aggressive investors will have to be willing to stomach sometimes up to a 50% drawdown. A more moderate investor investing in something that’s more like a mutual fund or the S&P your drawdown will be more along the lines of 20-30%. 

VAR(VALUE AT RISK)

This metric is more helpful to people that are focused on shorter-term trading. Like on a daily and weekly basis. Value at risk looks at a series of data and tells you what your average loss will look like 95% of the time. It tells you with a 95% confidence level. This is calculated by sampling losses over a certain period of time and looking to see where 95% of all the data falls. 

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