The Most Common Risk Ratios Used In Financial Analysis

Risk ratios. They’re at the core of every financial analysts’ research. And while there’s far too many of them for most non-finance people to use on a consistent basis, it could at least help to know how the most common risk ratios are used.

There are tools available to quickly plug in a ticker or chart and get a particular risk calculation. One such tool available for those looking for quick and comprehensive insight into a stock’s risk profile is a widget on the stock research platform FinanceBoards. The website’s Company Risk Ratio widget provides users 15 risk ratio calculations on a stock just by entering in the ticker. Below, we’ve uses Costco Wholesale Corporation COST as an example.


Data as of 8/18/17

While some of these ratios, such as alpha, beta, upside potential and possibly even things like the Sharpe and Modigliani ratios might be familiar. But chances are good that the majority are entirely unfamiliar. For the benefit of the perplexed, we’ll run through a few of these ratios and what they signify as succinctly as possible.

Beta: a measure the volatility on an investment as calculated against the performance of a benchmark, typically and index, with a higher number signifying greater volatility

Alpha: a measure of the returns on a single investment as calculated against the performance of a benchmark, typically and index, with a greater number meanings greater average returns

Sharpe Ratio: a common measure of risk calculated as an investment's annual rate of return minus the rate of return in a zero-risk investment (like bonds or treasury notes) all divided by the standard deviation in the investment.

We’ll pause here to dive into a few of the ratios that form a subset of these ratios that are derived from the Sharpe Ratio. While similarly formulated, the following ratios each aim to provide traders a slightly different view of an investment.

Treynor Ratio: the Sharpe Ratio, except using beta instead of standard deviation as the ratio’s divisor

Modigliani Ratio: the Sharpe ratio, but calculated so as to be expressed as a percentage

Conditional Sharpe Ratio: the Sharpe Ratio formulated so as to be predictive of potential future performance

Omega Ratio: achieves the same ends as the Sharpe ratio, but increases the scope of the calculation by incorporating return distribution over a span of time

Sortino Ratio: derived from the Sharpe Ratio, but distinguishes standard deviation between actual downside risk versus general market volatility

Kappa Ratio: A base number from which both the Omega and Sortino Ratio can be derived

Apart from those, the remaining ratios are also, for the most part, variations on a couple previous risk formulations.

Gain Loss Ratio: simply an equation that compares average gain over average loss in a given period

Upside Potential Ratio: Similar to Sortino ratio, but factors in minimum acceptable return by incorporating return distribution over a period of time rather than standard deviation

Sterling Ratio: used to calculate returns against volatility by dividing compound annual return by 90 percent of annual maximum potential loss

Calmer Ratio: similar to the Sterling Ratio, but calculated on a monthly basis rather than year to provide a more precise expression of typical potential for risk

Burke Ratio: similar to the Sterling Ratio, but discounting excess returns by subtracting the root of the maximum potential loss

You may find yourself leaning heavily on some of these ratios in your stock research. Or you may find yourself only referencing one or two of them. Whatever works for you. This particular widget on FinanceBoards is useful because it has all of the risk ratios in one place.

FinanceBoards is an editorial partner of Benzinga.

Posted In: EducationMarketsGeneralFinanceBoardsWooTrader
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