As we know, the key to a perfect investment is low risk and high gain. And though this is hard to come by we can still strive to get close. But there are also invaluable metrics to an investment that needs to be assessed when working on your portfolio risk analysis.
The annual return is also titled the compounded annual growth rate. It is calculated using monthly closing prices and divided distributions. There is a common mistake when completing an annual return assessment and that is using a simple average return. The problem with this is that it can create misleading calculations over a 2 year period. For example, if a company is down 50% at the end of the first year, and rises 50% in the second, it would look as though the company is even. Though they are really 25% down.
Measuring investment risk it’s closely associated with volatility. When you take on an investment with a high risk you will expect a high return. The high returns are a reward for being brave enough with risk and this is called risk premium. In general, the higher the potential return, the higher the volatility.
Correlation is the measure of two securities that move in relation to each other. When you construct your investment portfolio you don’t always want your options taking on the same style. This though is easier said than done and with market fluctuation it becomes increasingly difficult to evaluate. Ideally you want assets in your portfolio to have a negative correlation, so when one is up, another is down. Though in a perfect world all would be up.