How does TBanque calculate and present risk?

Generally, investors use risk to measure an investment’s historical performance to better evaluate its potential gains and losses in the future. An investor’s risk is represented by a number between 1 (low risk) and 10 (high risk) on their user page. This is their Risk Score.

 

This is commonly done by measuring the standard deviation of an investment’s value. This measurement indicates how sharply the value of that investment changes over time. The sharper the deviation, up or down, the more volatile the investment and the riskier it may be considered.

 

Risk can be used to measure individual assets or portfolios. At TBanque, we present the risk of an investor’s portfolio accounting for all of the assets within it.

 

The Risk Score reflects their portfolio’s maximum volatility as a range of percentages:

 

This percentage range is based on the standard deviation of that investor’s assets. Simply put, it provides an aggregated and weighted measure of the portfolio’s change in gains or losses over time. 

 

Note, if you see a score as “0” it means the users portfolio is 100% cash and therefore has zero volatility.

 

There are many factors that can influence an investor’s risk.

 

Volatility

The more volatile the individual assets making up an investor’s portfolio, the higher the risk.

 

Diversity 

A portfolio with more diversified assets may have less risk as it may include individual assets that are less volatile. Furthermore, if the asset mix has inverse correlations this also reduces the risk of a portfolio. For example, if the portfolio contains both oil and airline stocks: often when the price of oil goes up, airline stock values go down (and vice versa), that portfolio’s risk will be lower.

 

Long and Short Strategies

Portfolios that contain both long and short positions (especially in the same asset) may be less volatile, because market movements will be counterbalanced by the opposing position. Portfolios that are only long or short will react in direct correlation to market volatility.

 

Leverage Positions and Leveraged ETFs

Leveraged positions (investments using margin) in a portfolio will amplify its risk, because their value increases and decreases at a higher rate relative to their underlying investment amount. Similarly investments in leveraged ETFs can also be highly volatile and also add to a portfolio’s risk.

 

Risk is a historical measure and thus, may not be indicative of future performance. It is not investment advice.