|By Nathan Young|
June 18, 2017
When you evaluate a position for a portfolio, you always look at the risk and try to measure it. With market risk adjusted performance, this is taking the market risk and quantifying it. Understanding market risk is important because each market will have different risk levels and variables.
Another way to view this is to measure how much risk is being assumed and what the returns amounted to. Knowing risk is certainly one of the most important aspects of investing and is ignored too often in light of potential returns. This type of research can be applied to individual securities as well as portfolios.
Some aspects that contribute to risk are volatility, which measures how much movement you can expect to see in an investment. Typically, you do not want to see high volatility levels because that can cause extreme movements and unwanted fluctuations in portfolio value. Next, you want to look at liquidity and ensure the markets you are investing in have people that are also interested in the same equity. Nothing is worse than being stuck in a position you are unable to get out of. Lastly, ensure the markets you are investing in are well known and have data you can analyze because this will give you the best picture about what you are investing in.
Research on the Internet how people use market risk adjusted performance in their analysis and try that in your current investing model. Open a demo account and see if it fits well with your current situation, hopefully giving you an advantage. Also, join an investing community or trading community where you can bounce your ideas off of people who are active participants in the market.
Knowing risk and how it will affect your portfolio is key because you want to keep risk low and returns high, and finding that perfect balance can take time and research. Risk should be just as important as anything and be sure to use this tool in an affective manner. There are similar risk tools out there so find one that is right for you and keep on going.