Saturday, October 16, 2021


Ask the CFP Practitioner

“A bend in the road is not the end of the road…Unless you fail to make the turn.”

 ~ Helen Keller

Question: What methods are used to determine if there’s the right amount of risk exposure in a portfolio and how it may influence investments?

Answer: Risk is a tricky factor to evaluate and examine. The two components are based on qualitative and quantitative factors. There are mathematical approaches to quantify how different investments may interact with one another. These tools are often used as guides for constructing and reviewing portfolios. The other side of risk is more subjective and qualitative, making it more challenging to assess. The difference between the two factors is based on mind over matter, or gut feelings as compared to intellectually understanding something. Ideally, the two will be in harmony, but the nature of investing is that there will be times of discord.

A softer skill set is required for gut level emotional risk factors. This is usually explored through conversations and questions advisors use to gauge how someone has dealt with risk in the past, how they may react to volatility based on their current situation, outside influences, and future financial needs. For instance, when asked what you’d do if your portfolio dropped 20% in one month, someone may say indicate that they’d be concerned but would stay invested. When actual dollar amounts are discussed, a 20% drop on a one million dollar portfolio equals a paper loss of $200,000. That could cause great concern, panic and perhaps the sale of a portfolio. Qualitative questions are designed to zero in on these more abstract feelings.

Intellect and standardized quantitative measures are the second tool when assembling and monitoring investments. The starting point to quantify measurements are benchmarks. Historic benchmarks may be used to illustrate past performance, which we all know is not indicative of future results. Many find that it’s less stressful to ride the waves of volatility knowing that there is plan in place incorporating different investment vehicles. With the help of a trusted financial advisor, data is used to determine how different investments will work together in a unified manner to best match unique and personalized needs. The word “need” is specifically used in contrast to “wants.” Some investors want to outperform a benchmark and may not understand the risk involved with that request.

If you’re interested in having a passing familiarity with quantitative risk measurement tools used in portfolio construction, here are a few of the more common terms and their explanations. Risk management is an art and a science.

ALPHA measures a portfolio’s risk-adjusted performance against that of its benchmark. Positive indicates relative outperformance while negative suggests the opposite.

BETA quantifies the volatility of a security or portfolio in relationship to market movements. A beta of less than 1.0 indicates likely lower volatility and greater than 1.0 means volatility is likely higher than the market.

CAPTURE RATIOs of market volatility measure the percent of benchmark return captured by a portfolio manager during a specified period. Upside capture: A ratio greater than one indicates that the portfolio outperforms in up markets. Downside capture: A ratio less than one, even negative, indicates that the portfolio outperforms in down markets.

CORRELATION measures how a portfolio’s asset classes move in relation to each other in response to market events. Correlation ranges from +1 to -1. The closer two assets are to a +1 correlation, the more likely they are to move in the same direction. A negative correlation indicates two assets moving in opposite directions. Low or negative correlation among assets within a portfolio may help reduce overall portfolio volatility.

INFORMATION RATIO measures the consistency of a portfolio manager’s performance versus the benchmark. A higher, positive information ratio indicates the manager has beaten the benchmark without taking excessive risks.

STANDARD DEVIATION is a common statistical measure of portfolio volatility. Standard deviation measures how much a portfolio’s total return varies from its mean or average. The more a portfolio’s returns fluctuate from month to month, the higher its standard deviation and the greater its volatility.

It’s impossible to know whether given your time frame, circumstances and goals, if you’ll be on the winning side of the risk/reward relationship. Riding the ups and downs may be more feasible knowing that you have a plan in place that includes cash to cover expenses for a planned life events over a certain period of time.

Assessing the quantitative factors described above is one component of portfolio design and management. This is why being conversant in how risk is measured and managed may be helpful when designing and monitoring your portfolio. Knowing yourself, your comfort levels with risk and how you may react in certain circumstances can be just as important. Stay focused and invest accordingly.

Any opinions are those of the financial advisor and not necessarily those of Raymond James. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor. All investments contain risk, including loss of principal. Views are as of September 17, 2019 and subject to change based on market conditions and other factors.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.”

This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email Website:

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