Simple Pound

Change to Portfolio Return series

July 18, 2008

When I started to research the risk element of my Portfolio Returns series I had no idea what can of worms I was about to open… from the lack of consensus regarding what risk actually is and how it can be properly defined and measured to an abundance of metrics trying exactly that. The different approaches vary significantly but most of them have one thing in common - a high level of abstraction and greek symbols

Don’t get me wrong - I find this extremely exciting and interesting and I’m certainly going to write about it in the near future, but from a logical point of view it might make more sense to cover a few statistical concepts first.

This is why I will be changing the initial order of the Portfolio Returns series to the following:

1. Post : The Basics (covered on June 28th)
Arithmetic mean (average loss, average gain), geometric mean, frequency distribution, maximum value, minimum value, positive # of years / months / weeks, negative # of years / months / weeks.

2. Post : Statistics (previously 3rd post)
Standard deviation, semi-variance (semi-deviation), downside variance and below-target probability.

3. Post : All About Interaction (previously 4th post)
Covariance: degree of variability of returns between two assets, correlation coefficient, units of annual return per unit of standard deviation, expected final value of $1.00 / £1.00.

4. Post : First lesson in Greek (previously 5th post)
Beta coefficient or an assets’ degree of responsiveness to market movements.

5. Post : Advanced Greek (previously 6th post)
Alpha or superior returns.

6. Post : More Jargon (previously 7th post)
Sharpe ratio.

7. Post : Risk (previously 2nd post)
VAR: value at risk, M-squared.

I think this order will prepare us nicely for the last topic which also turns out to be the most challenging and complex. The post on Statistics will follow shortly, stay tuned!