How to Measure Portfolio Risk By Stewart Strawbridge

IntroductionStewart Strawbridge, a graduate of

Bowdoin College, currently serves as a managing member at Selkirk Management LLC. Along with co-founders Tom Oatman and Christian Amundsen, Stewart Strawbridge leverages his position at Selkirk to develop global secular themes for both short- and long investments in equities. His responsibilities include the management of portfolio risk and exposure levels.

About Risk Management Risk management is a vital part of the financing and

investment field. Being able to successfully calculate when to invest and when to divest separates the elite portfolio managers from their peers. There are three basic formulas for calculating portfolio risk at any given time. When using the Beta measurement for portfolio risk, current movements in the market are emphasized above all other factors. When using the Beta measurement, the market as a whole is designated a score of 1.0, while portfolios with a higher score present both increased risk and potential value. Alpha measurements are constructed in a similar fashion, though they prioritize trends in stock prices over general market movements. The third and most complex way of gauging portfolio risk is the Sharpe ratio. Using this method, the standard deviation of a portfolio is used to determine a portfolio’s increase in value in relation to its increase in risk.