There are four primary measures of investment risk that apply to the analysis of stock, fixed income, and mutual fund portfolios. They are Alpha, Beta, R-Squared, Standard Deviation, and Sharpe Ratio. These statistical measures are historical predictors of investment risk/volatility and are all important elements of Modern Portfolio Theory. The experienced risk-adjusted mutual fund agents of JP investments always take care of those things.

Modern Portfolio Theory is a standard financial and academic methodology used to evaluate the performance of investments in stocks, bonds and mutual funds by comparing them to market benchmarks.

Alpha is a degree of an investment’s overall performance on a risk-adjusted basis. Get the volatility (price risk) of a portfolio of securities or funds and compare its risk-adjusted performance to a reference index. That alpha is the investment’s excess return over the return of the benchmark index.

Simply put, it is often thought of as a value that a portfolio manager adds or subtracts from a fund’s portfolio returns. An alpha of 1.0 means the fund outperformed the reference index by 1%. So, an alpha of -1.0 indicates a 1% underperformance. For investors, the higher the alpha, the better.

Beta Factor, is a measure of a security’s or portfolio’s volatility or systematic risk relative to the overall market, carefully understand by risk-adjusted mutual fund agents. Beta is calculated using regression analysis and represents the tendency of investment returns to respond to market movements. By definition, market beta is 1.0. Individual securities and portfolios are valued according to their deviation from the market.

A beta of 1.0 indicates that the price of the investment moves with the market. A beta less than 1.0 indicates that the asset is less volatile than the market. Therefore, a beta greater than 1.0 indicates that the asset’s price is more volatile than the market. For example, a fund portfolio with a beta of 1.2 is theoretically 20% more volatile than the market.

R-squared is a statistical measure representing the proportion of a fund’s portfolio or security movement that can be explained by movements in a benchmark index. For fixed income securities and bond funds, the benchmark is the United States. Treasury bill. The S&P 500 Index is a benchmark for stocks and equity funds.

R-squared values range from 0 to 100. According to Morningstar, mutual funds with R-squared values between 85 and 100 have performance that correlates closely with the index. Funds rated 70 and below generally do not perform like indexes.

Standard deviation measures the variance of the data from the mean. Basically, the more dispersed the data, the greater the deviation from the norm. In finance, the standard deviation is applied to an investment’s annual rate of return to measure its volatility (risk).

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