Risk-Adjusted Ratio
Standard Deviation:
In finance, standard deviation is a tool for statistical measurement of volatility in the stock returns. Higher the standard deviation of stock, more is its tendency from its expected returns. Hence, the investor has to face high risk if he invests in that particular stock and will demand higher return for taking high risk.
Beta:
A standard measure for market risk, Beta measures stock volatility in comparison to the market. For Instance, since the market portfolio has Beta of 1, any stock with Beta value of 1 means that it will move with the market. Similarly, if a stock has a beta of 1.2, this means that stock returns are 20% more volatile than the market.
Alpha:
A statistical measure that measure risk-adjusted performance of the stock. For Instance, excess return earned by portfolio in relating to a market index or any other benchmark is Alpha. Hence, an alpha of 1% means that the asset has outperformed the benchmark by 1% and vice-versa.
Sharpe Ratio:
Another multiple to measure risk-adjusted performance of the portfolio, Sharpe Ratio is a ratio of stock returns versus its risk. In other words, this ratio indicates if the stock has gained excess returns because of prudent investment decision or just because of high risk. Hence, higher is the Sharpe ratio, better will it be its risk-adjusted performance.
Formula: (Expected Return- Risk Free Rate)/ Standard Deviation of the stock]
Treynor Ratio:
Also referred to as ‘’Reward-to-volatility ratio’’, this ratio is another measure of risk-adjusted performance and indicates excess return that are earned per unit of market risk(beta). Treynor Ratio is calculated using the following formula:
Formula: (Expected Return- Risk Free Rate)/ Beta of the stock]
R-Square:
Usually calculated through regression analysis, R-Square multiple indicates the percentage of fund or security movement that is explained by market index or benchmark. A higher R-Square multiple indicates that stock movements are replicated through movement in market index.
Works Cited
Aplha. n.d. 24 November 2014 <http://www.investopedia.com/terms/a/alpha.asp>.
Beta. n.d. 24 November 2014 <http://www.investopedia.com/terms/b/beta.asp>.
R-Squared. n.d. 24 November 2014 <http://www.investopedia.com/terms/r/r-squared.asp>.
Sharpe Ratio. n.d. 24 November 2014 <http://www.investopedia.com/terms/s/sharperatio.asp>.
Standard Deviation. n.d. 24 November 2014 <http://www.investopedia.com/walkthrough/fund-guide/introduction/1/standard-deviation.aspx>.
Treynor Ratio. n.d. 24 November 2014 <http://www.investopedia.com/terms/t/treynorratio.asp>.
