Tag: portfolio risk analysis

Portfolio Risk Analysis

Posted by WFG – June 23, 2011

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.

Annual Return

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.

Volatility

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

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.

Managing Portfolio Volatility

Posted by WFG – June 23, 2011

While stocks and volatile investments are often profitable in the long run, many can be short term nightmares. If you’re investment plans include short terms goals then you’ll want to manage your portfolio management to lower volatile investments.

  • Start by making a list of all your investments. This includes stocks, mutual funds and bonds. Note down the category that they each fall under.
  • Find out the beta coefficient of mutual funds in your investment portfolio. This can be done by looking through financial publications such as the Wall Street Journal. If the beta is high then the investment will be more volatile.
  • Split your investment portfolio into funds that you can keep long term, and short term. The short term money should be put into risk free investments.
  • Take a look at the mutual funds you own to see if they’re diversified. An investment portfolio with good diversification will contain different caps. You can create diversification by purchasing the total stock market index funds.
  • Invest some of your funds outside of your home country. This will add diversification to your investment portfolio. It does this because foreign investments aren’t affected in the same way as home country currency.
  • You should perform portfolio risk analysis every few months to keep on track with your market. Markets fluctuate and it’s better to stay on top of the changes.

For more information on your investment portfolio contact the Winflow Financial Group.

Systematic Risk

Posted by WFG – June 22, 2011

The threat of systematic risk is always present, even for the investors that are great at portfolio risk analysis. When you are talking about a trader, they will always be aware of systematic risk and will look for new ways to hedge it.

But what is systematic risk? This is the risk that the whole financial markets will crash, much like the recession in 2008. It can be caused by a number of reasons such as interest rate hikes, a subprime crisis or a country defaulting on its debt. The threat of systematic risk is very real in the modern market with much of Europe in a crisis.

So, how do we hedge out systematic risk and make it less of a threat? For starters, you won’t be able to wipe it out completely. When a market crashes all investments will be sold, apart from flight of safety investments, and even these aren’t always safe. But there are ways of lowering risk. In US, the USD represents the economy for the country. Reducing the exposure to the US economy you can ultimately reduce the systematic risk. You can do this by evaluating the stocks.

By using portfolio management investment you can change the stocks you own.  For every market you’re long, you should try to gain a shorter position. This will give you an advantage when the market sees problems and the value of the USD changes.