Whats the general/standard way (hopefully there is such a thing) to measure risk historically on an asset?
Hi Jane,
Typically, the risk measurement would be based on your portfolio and strategy, however below are some standard industry practises:
Calculating the asset's return standard deviation is a common approach. Standard deviation is a measurement of how far apart a set of data is from the mean, and it can be used to determine how much the returns on an asset deviate from the average over time. A higher standard deviation denotes higher risk, while a lower standard deviation denotes reduced risk.
Another way to measure risk is to calculate the asset's beta. Beta is a measure of the volatility of an asset relative to the overall market. A beta of 1 indicates that the asset's price is expected to move in line with the market, while a beta less than 1 indicates that the asset is less volatile than the market, and a beta greater than 1 indicates that the asset is more volatile than the market.
There are also other risk metrics that are commonly used, such as the Sharpe ratio and the Treynor ratio. The Sharpe ratio is a measure of the return on an asset adjusted for its risk, while the Treynor ratio is a measure of the return on an asset adjusted for its systematic risk.
In the end, you should always compare the risk of your portfolio with the benchmark to get a better idea.
Hope this was helpful.
Thanks,
Rushda