§ 01
| Metric | What It Measures | Good Target |
|---|---|---|
| Sharpe Ratio | Return per unit of risk | Above 1.0 (rough guide; needs a long sample + benchmark) |
| Beta | Correlated movement with the market (not total volatility) | 1.0 = same as market, <1 = less volatile |
| Max Drawdown | Worst peak-to-trough loss | Lower is better -- but the S&P 500 itself has had 15+ drops of 20%+ since 1926 (one roughly every 7-10 years), so a 20% drawdown is the price of the equity risk premium, not a failure. Lower drawdown means lower expected return -- adjust by adding bonds, not by stock-picking. |
| Correlation | How stocks move together | Lower correlation = better diversification |
§ 02
Sharpe Ratio = (Portfolio Return - Risk-Free Rate) / Portfolio Std Dev
§ 03
All three inputs must be annual figures. If the only volatility you have is monthly, annualize it first: multiply the monthly standard deviation by the square root of 12 (about 3.46). Mixing a monthly volatility with an annual return makes the Sharpe ratio look far better than it really is.
§ 04
Open the **Portfolio Analytics** tab and check your Sharpe Ratio, Beta, and Max Drawdown. Is the risk justified by the return?
§ 05
§ 06
Portfolio A: Sharpe 1.2, max drawdown 15%. Portfolio B: Sharpe 0.9, max drawdown 8%. Which is the better portfolio?
Five questions · AI feedback
Sit with the ideas.
Portfolio A has Sharpe 1.5 and Portfolio B has Sharpe 0.5. Which gives better risk-adjusted returns?
Why: