Question 1

What does portfolio alpha measure?

Accepted Answer

Alpha measures the skill-based return you earned above a risk-adjusted benchmark. A positive alpha means your strategy added value compared to simply holding the market after accounting for volatility exposure (beta). Negative alpha means you took risk without being rewarded.

Question 2

How should I interpret beta?

Accepted Answer

Beta shows how sensitive your portfolio is to market movements. A beta of 1.3 means your portfolio typically moves 30% more than the benchmark—up or down. Beta below 1.0 signals a more defensive posture, while negative beta means you tend to move opposite the market.

Question 3

What does portfolio alpha measure?

Accepted Answer

Alpha measures the skill-based return you earned above a risk-adjusted benchmark. A positive alpha means your strategy added value compared to simply holding the market after accounting for volatility exposure (beta). Negative alpha means you took risk without being rewarded.

Question 4

What is the Sharpe ratio and what is considered good?

Accepted Answer

The Sharpe ratio measures how much excess return you earn for each unit of volatility. A Sharpe ratio above 1.0 is considered solid, above 1.5 is strong, and 2.0+ is institutional grade. Ratios below 1.0 suggest you are not being paid enough for the amount of risk you take.

Question 5

How should I interpret beta?

Accepted Answer

Beta shows how sensitive your portfolio is to market movements. A beta of 1.3 means your portfolio typically moves 30% more than the benchmark—up or down. Beta below 1.0 signals a more defensive posture, while negative beta means you tend to move opposite the market.

Question 6

Why use Sortino ratio instead of Sharpe?

Accepted Answer

Sortino ratio focuses only on downside volatility—returns that fall below your minimum acceptable return (MAR). It ignores upside volatility, making it better for portfolios with asymmetric payoff distributions or investors who care more about drawdowns than big gains.

Question 7

What is the Sharpe ratio and what is considered good?

Accepted Answer

The Sharpe ratio measures how much excess return you earn for each unit of volatility. A Sharpe ratio above 1.0 is considered solid, above 1.5 is strong, and 2.0+ is institutional grade. Ratios below 1.0 suggest you are not being paid enough for the amount of risk you take.

Question 8

How is maximum drawdown calculated?

Accepted Answer

Maximum drawdown measures the largest peak-to-trough decline in your portfolio value. It highlights the worst historical loss and the recovery time needed to break even. Comparing your drawdown to the benchmark reveals whether you weather market stress better or worse.

Question 9

Why use Sortino ratio instead of Sharpe?

Accepted Answer

Sortino ratio focuses only on downside volatility—returns that fall below your minimum acceptable return (MAR). It ignores upside volatility, making it better for portfolios with asymmetric payoff distributions or investors who care more about drawdowns than big gains.

Question 10

Should I always compare to the S&P 500?

Accepted Answer

Use benchmarks that match your investment strategy. For U.S. large-cap stocks, compare to the S&P 500; for balanced portfolios, use a 60/40 blend; and for income funds, refer to bond indices. The closer the benchmark aligns with your assets, the more useful your performance analysis will be.

Question 11

How is maximum drawdown calculated?

Accepted Answer

Maximum drawdown measures the largest peak-to-trough decline in your portfolio value. It highlights the worst historical loss and the recovery time needed to break even. Comparing your drawdown to the benchmark reveals whether you weather market stress better or worse.

Question 12

How can I reduce portfolio volatility?

Accepted Answer

Diversify across asset classes, rebalance regularly, trim oversized positions, and consider hedges or defensive allocations. Lower volatility often comes from mixing uncorrelated assets and keeping position sizes aligned with your risk tolerance.

Question 13

Should I always compare to the S&P 500?

Accepted Answer

Use benchmarks that match your investment strategy. For U.S. large-cap stocks, compare to the S&P 500; for balanced portfolios, use a 60/40 blend; and for income funds, refer to bond indices. The closer the benchmark aligns with your assets, the more useful your performance analysis will be.

Question 14

How can I reduce portfolio volatility?

Accepted Answer

Diversify across asset classes, rebalance regularly, trim oversized positions, and consider hedges or defensive allocations. Lower volatility often comes from mixing uncorrelated assets and keeping position sizes aligned with your risk tolerance.

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