Risk Measures


Risk Measures
Statistical measures that are historical predictors of investment risk and volatility and major components in modern portfolio theory (MPT). MPT is a standard financial and academic methodology for assessing the performance of a stock or a stock fund compared to its benchmark index.

There are five principal risk measures:

Alpha: Measures risk relative to the market or benchmark index
Beta: Measures volatility or systemic risk compared to the market or the benchmark index
R-Squared: Measures the percentage of an investment's movement that are attributable to movements in its benchmark index
Standard Deviation: Measures how much return on an investment is deviating from the expected normal or average returns
Sharpe Ratio: An indicator of whether an investment's return is due to smart investing decisions or a result of excess risk.

Each risk measure is unique in how it measures risk. When comparing two or more potential investments, an investor should always compare the same risk measures to each different potential investment to get a relative performance.


Investment dictionary. . 2012.

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