Sometimes, to evaluate their portfolio performance, investors might look at the starting and ending values of their portfolio, or the simple rate of return, but they forget about the most important part—the risk they took to get there.
The simple rate of return only gives investors a percentage change in their portfolio, and nothing more than that. If someone wants to be a better investor, they must consider the amount of risk they took in order to get that rate of return and how their portfolio reacts to swings in the overall market.
To better evaluate their portfolio, investors can look at a few other measures, aside from the simple rate of return, including portfolio standard deviation and the portfolio beta.
Portfolio Standard Deviation
The name “standard deviation” may sound very demanding at first, but at the very core, it gives investors an idea about the volatility in their portfolio or how much risk their portfolio holds. Investors can calculate this portfolio evaluation measure with a simple calculator or with the help of “Excel” within minutes.
If an investor finds that their portfolio has high standard deviation, then it means that their portfolio will have wild swings. Similarly, lower standard deviation means lower volatility in their portfolio.
When an investor calculates the portfolio beta, they are evaluating the performance of their portfolio with the return of the overall market or a certain index. To calculate the beta of their portfolio, investors need the betas of the holdings in their portfolio and their returns. (The betas of stocks are available on financial web sites and the beta of the … Read More