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Equity Markets Essay

885 words - 4 pages

A portfolios risk plays a huge role in an investors expected returns which is why it is so important to not only be able to measure this risk but also to have some sort of control over it. There are many different risk measures that are available which are becoming much easier to perform with the technology these days. Some of the most common include the standard deviation, Beta, Alpha and the sharp ratio. Using the correlation and covariance can also be useful when it come to diversifying a portfolio and reducing risk. Another thing that should be considered is the number of securities within the portfolio because this has a large impact on diversifiable risk.

1)Risk measures

-Why ...view middle of the document...

The value at risk (VaR) can also be a good benchmark for target for risk but it does not really add any information regarding the risk itself.

mean absolute deviation
value at risk (VaR)
Mean absolute deviation (MAD)

-Which risk measures would you consider in the analysis of your own portfolio given your preferences?

When evaluating a portfolio of my own I would most likely use all of the measurements mentioned above as I am very conservative when it comes to investing my money. By using more then one risk measurement I am able to better understand the relationship between risk and reward of the portfolio. For example as a risk averse investor I would try and construct a portfolio with the lowest standard deviation and beta as this will have the lowest volatility in terms of the securities themselves and the market. It is also a good idea to look for securities with a high alpha as they tend to be undervalued, and if they have consistently outperformed in the past they should be considered a less risky investment. I would also consider the sharp ratio as it is a great way of looking at a portfolios risk and the rewards that can potentially come with it. " This measurement is very useful because although one portfolio or security 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." (5 ways to measure mutual funds risk, 2012). By using all of these risk measurements I will be able to put together...

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