What You Need To Know
Asset allocation models? True diversification strategies? Past performance as a reason to buy mutual funds? NO, NO, and NO. If you will learn the following definitions, you will be in a much better position to invest. It is these, in our opinion, that are the key in protecting and growing our clients’ money.
ALPHA - is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk of a mutual fund and compares its risk adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a funds alpha.
BETA – is a measure of the volatility of a portfolio relative to the overall market. A beta less than 1.0 indicates a lower risk than the market; a beta greater than 1.0 indicates higher risk than the market.
STANDARD DEVIATION – is a statistical measure of the historical volatility of a mutual fund or portfolio, usually computed using 36 monthly returns.
SHARPE RATIO – is calculated by subtracting the risk-free rate – such as that of the 10-year U.S. Treasury bond – from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. The great a portfolio’s Sharpe ratio, the better its risk-adjusted performance has been.
If you don’t know these definitions as it relates to your own portfolio, maybe it’s time we sat down together and find out how much risk you’re really accepting for the returns you’re getting.