Category: investments

  • Risk appetite definition

    Risk appetite definition

    It is clear that some people are more comfortable investing in risky stocks than others. In a similar vein, some firms carry significantly more operational risks and/or financial risks than their competitors. Therefore, the appetite for risk varies across both firms and individuals. But, what is risk appetite? Generally speaking, an individual’s or an organization’s […]

  • Sequence of returns risk and why it’s important

    Sequence of returns risk and why it’s important

    Sequence of returns risk is the risk that your investments will fall sharply in the first 5-10 years of retirement and larger returns will not come soon enough to allow them to recover.  This risk is specific to the descent stage of your financial journey, when you are drawing an income from your investments in […]

  • What is the risk-free rate?

    What is the risk-free rate?

    The risk-free rate is the rate of return earned on a risk-free asset. While returns on risky assets such as stocks are uncertain, the key distinction of the risk-free rate of return is that we know its exact value at the time of investment. For example, we may expect a stock to yield 8% over […]

  • Return volatility formula and calculator

    Return volatility formula and calculator

    We start this lesson by discussing what is meant by (stock) return volatility. Then, we explain the return volatility formula. Finally, a simple return volatility calculator is provided for your convenience. Jump to: What is (stock) return volatility? Return volatility formula Return volatility calculator What is (stock) return volatility? Imagine an investor who bought shares […]

  • Arithmetic average return calculator and formula

    Arithmetic average return calculator and formula

    In this lesson, we introduce a simple yet really useful measure of investment performance. In particular, we discuss the arithmetic average return formula and provide a practical arithmetic average return calculator. It is really important for investors to be able to accurately assess the performance of their investments. In that sense, arithmetic average (or mean) […]

  • Geometric average return calculator and formula

    Geometric average return calculator and formula

    In this post, we explain the geometric average return formula using numerical examples and discuss how it differs from the arithmetic average return. We provide a practical geometric average return calculator as well. Jump to: Geometric average return formula Geometric average return calculator Geometric average vs arithmetic average Geometric average return formula The geometric average […]

  • Treynor ratio formula and calculator

    Treynor ratio formula and calculator

    As part of our investments course, we have already covered two important investment performance measures: Jensen’s alpha and Sharpe ratio. In this post, we focus on the Treynor ratio, which is another popular risk-adjusted performance measure. In particular, we explain the Treynor ratio formula and offer an easy-to-use Treynor ratio calculator as well. Jump to: […]

  • Risk aversion coefficient – meaning and formula

    Risk aversion coefficient – meaning and formula

    When we discussed investors’ risk preferences, we distinguished between risk-averse, risk-neutral, and risk-seeking behavior. We also explained that risk-averse investors expect compensation for bearing risk, which is called a risk premium. But, how do measure risk aversion? The answer is the risk aversion coefficient. It quantifies the degree to which an individual dislikes risk. In […]

  • Jensen’s alpha formula and calculator

    Jensen’s alpha formula and calculator

    When evaluating the performance of mutual funds, ETFs, or your own portfolio, it is vital to do that on a risk-adjusted basis. That is, it would be misleading to compare investment opportunities on the basis of returns only as higher returns normally require bearing more risk. In this post, we discuss one of the most […]

  • Sharpe ratio calculator, formula, examples

    Sharpe ratio calculator, formula, examples

    The Sharpe ratio is a popular tool used in performance evaluation. In this post, we offer a Sharpe ratio calculator as well as explain the formula with examples. Jump to The Sharpe ratio formula Using the Sharpe ratio to evaluate performance – an example Ex-ante vs ex-post Sharpe ratio The Sharpe ratio vs the Treynor […]