# 8 Risk (Adjusted) Statistics Summarized

Risk Statistics

Standard Deviation -Standard deviation is a measure of how spread out values are in a series of returns. In calculating the standard deviation, it gives investors a “standard” way of knowing what is normal, and what is outside the range of normality. A lower standard deviation is better, and it means returns are more likely to be in a narrower range, whereas a larger standard deviation means returns are more likely to be scattered and less consistent. Standard deviation can be calculated based on multiple time horizons, most commonly monthly and yearly. Standard deviation should be assessed in conjunction with the monthly and/or yearly returns to grasp whether the investment is worth considering. Again, the main thing to remember is that the smaller the number the better. For a more detailed discussion please read, A Better Measure of Risk: Standard Deviation or Downside Deviation?

Downside Deviation – Similar to standard deviation, downside deviation measures how spread out values are in a series of returns, giving investors a range of returns to expect in the future. The difference between the two, however, is that standard deviation takes into account both positive and negative returns, whereas downside deviation only takes into account the negative returns. Downside deviation throws out the positive values in a return stream, eliminating positive volatility from its calculation. Many advisors put a heavier emphasis on downside deviation versus standard deviation, because it gives us a better understanding of what to expect in terms of risk. Similar to standard deviation, the lower the number the better, as we want downside deviation to be as close to 0 as possible. For a more detailed discussion please read, A Better Measure of Risk: Standard Deviation or Downside Deviation?

Maximum Drawdown – The maximum drawdown in an investment references the largest peak to valley loss during the course of any investment. Maximum drawdown is usually calculated based on monthly returns, however it is most effective looked at based on daily figures. In terms of a figure, maximum drawdown is relative to the overall investment and should be assessed based the investments average annual rate of return (ROR). The lower or smaller the maximum drawdown the better. A maximum drawdown nearly half of the average annual ROR is considered to be really good. For example, if an investment has an average annual ROR of 20%, a maximum drawdown of -10% is considered to be good. For a more detailed analysis of drawdown’s, please consider reading one of our earlier posts, The Drawdown Report.