Risk & Portfolio Management
6 terms
Sharpe Ratio
Risk & Portfolio Management
ratio (x, times)
Return above the risk-free rate per unit of total volatility.
Sharpe Ratio = (Portfolio Return - Risk-Free Rate) / Standard Deviation of Portfolio Returns
Sortino Ratio
Risk & Portfolio Management
ratio (x, times)
Return above a minimum acceptable return per unit of downside deviation only.
Sortino Ratio = (Portfolio Return - Target Return) / Downside Deviation
Standard Deviation
Risk & Portfolio Management
%
A measure of how far a set of returns typically sits from their average.
Standard Deviation = square root of the average of the squared deviations from the mean
Strategic Asset Allocation
Risk & Portfolio Management
%
A long-term target mix of asset classes based on objectives and risk capacity, held through market conditions.
Test: target weights are set for the long term and changed only when circumstances change, not when markets move
Stress Testing
Risk & Portfolio Management
%
Estimating how a portfolio would perform under specified severe but plausible adverse scenarios.
Test: apply a defined set of shocks to prices, rates, spreads and correlations, and compute the resulting portfolio value
Systematic Risk
Risk & Portfolio Management
qualitative
Risk affecting the entire market that cannot be removed by diversification.
Test: the risk arises from factors common to all assets, such as interest rates, inflation, policy or global shocks