Tag Archives: risk

Value at risk: how much money could I lose?

In investments, the main threat is a negative change in prices. Suddenly, the price trend turns down and you do not check regularly your portfolio. After some weeks, you discover that your portfolio devaluated. How could I have prevented it? Of course, you could maybe follow more often the markets or delegate in an advisor. The third option is having the right information and figures to preview possible losses if you do not trade in the markets often and take decisions from them.

Value at risk (widely known VaR for its initials) is the help figure for it. Look at the following picture from T-Advisor with these figures:

Value at Risk in T-Advisor

“My portfolio” has an -8,17% VaR. What does it mean? VaR is a statistical measure. In this case, the information that you get from it is: you can lose more than an 8,17% in a year with a probability of 5% for this portfolio if you do not trade in this period. Reading it on the opposite: there is a probability of 95% that you could lose at the most an 8,17% in a year.

In T-Advisor you can also compare your portfolio VaR with the smart benchmark (read our previous post) and the markets in which you invested. For instance, the risk of this portfolio is less than the indexes where we have some investments.

Moreover, you can obtain this figure as a proportion (above) or in absolute figures (below) linked with the volatility.

Risk profile from T-Advisor

But what if I had an undiversified portfolio? How to find out the risk of diversifying against not doing it? T-Advisor shows you this comparison both as a proportion and in absolute terms. You can also obtain the earnings if you diversify your positions.

Diversification benefits in T-Advisor

Risk is the great foe for investors. Nobody wants to lose money in the markets, but sometimes it happens, because markets are volatile (read more in our post about it). VaR is an intuitive figure, easy to understand, and provides an immediate picture of the money that we are risking for a combination of different stocks or assets, not just one. Such figure lets us react and change our positions to prevent losses if we consider that we are playing hard.

Smart benchmark, an automatic reference for your investments

Investors do not focus just on one stock, but in many of them. Moreover, investments usually organise in portfolios with several kinds of assets: stocks, ETF, mutual funds… With such mixture, it is difficult to follow the composite performance, if the investor do not have available the right tool.

For these cases, we have to follow the benchmark. What does it mean? The benchmark is the reference for your portfolio. It is an easy figure to be reported whether your portfolio is on-track or in the opposite way to achieve your performing target.

Let’s have a look at this picture from T-Advisor:

Smart benchmark with other figures in T-Advisor monitor

What information do we have available? First of all, we have the performance of our portfolio from the beginning of our investments and from the beginning of the current year.  Below it, we have the benchmarks from the indexes where we have assets in our portfolio and… the smart benchmark.

Smart benchmark is a functionality provided by T-Advisor for its users. You do not have to calculate, because T-Advisor automatically shows the figure. What information do you get from it? It mixes the different indexes benchmarks in the proportion you have in the portfolio and obtains a composite benchmark. So, you can compare if you are on-track or far from the performance you are looking for and from the market trend.

But you get still more in T-Advisor with smart benchmark. You can also compare the portfolio risk with the benchmark risk, comparing performance, volatility, value at risk and shape ratio. These figures report accurately to take decisions about your own investments: am I wrong with my investments? What should I change?

Smart benchmark in portfolio risk T-Advisor monitor

Finally, it is to underline that T-Advisor has developed this tool so that every user has at his or her disposal an automatic reference to compare the evolution of his or her portfolio and take the best decisions to maximize the investments.

Liquidity and volatility, inverse relationship

T-Advisor volatility and liquidity figures

Finance markets have a steady factor to be considered: risk. When we invest our money in any asset, we take a risk, because it is not given for sure that the value will increase so much as we expect. Even we cannot be sure if the value will increase.

The analysis about the risks in our investments has to take into account two measures: liquidity and volatility. The liquidity reports about the asset’s ability to be sold without changing significantly the price and with the minimum loss. For instance, housing is less liquid than bonds or stocks. This example is easy to perceive, but it is not so easy, when we compare stocks or bonds. Technical and fundamental analysis tools are needed.

On the other hand, volatility reports about the variability of an asset’s price in a certain period. In other words, how far are current prices from its average. The more changes up and down, the more volatile. There are many reasons that alter highly the prices: a crisis, rumours, figures, political or economical decisions. There are some references to measure volatility in stocks indexes: VIX for S&P500, VXN for Nasdaq or VXD for Dow Jones, just to mention some of a long list.

Separately, both measures offer the investor some information, but linking both the investor obtains much more. There is an inverse correlation, because a very volatile asset is less liquid. Money exposes to more losses when we play so risky. But the ones who follow markets and use tools to be reported about stocks for trading can get higher revenues profiting from this violent changes in the prices.

This is, for instance, the case of T-Advisor. The suite offers graphical studies about volatility and liquidity of every stock. An investor has available the last 6 years volatility figures and the risk evaluation. It also compares the stock volatility with the main stock indexes as MSCI or Euronext. After having the best information, it is just the investor decision: how risky is your investor’s profile?

T-Advisor board for volatility compared with indexes