**Determining Individual Holdings Return & Volatility**

In order to determine a portfolio's risk score, we first need to determine each individual holdings:

expected forward looking return

expected forward looking volatility

Let's use a hypothetical example, US Large Cap stock ABC

**Calculating the expected forward looking returns**

Map the security to the appropriate asset class, in this case US Large Cap > look at the forward looking returns per the asset class

Run a 5 year regression to identify the beta (how variable are the returns compared compared to US Large Cap):

US Large Cap forward looking return=

**6.94%**ABC's beta is

**1.65**Now take

**1.65*6.94%**to determine ABC's forward looking return of**11.5%**

**Calculating the Expected Forward Looking Volatility **

Take the daily volatility of ABC / daily volatility of US large cap

Then multiply the above ratio by the expected forward looking volatility of US Large Cap:

**1.85*16.37%= 30%**

Now, we use the formula to calculate the 1% VaR, or Risk score for ABC Stock

11.5 - (2.317*30)= 58

Complete the above steps for each individual security in the portfolio

**Calculating the Risk Score of the overall portfolio**

We first calculate the expected return of the overall portfolio, which is simply a weighted average of the expected returns of the individual holdings

We then use the expected return and volatility of the individual holdings, as well as the covariance matrix between the holdings to calculate the portfolio's overall volatility

Now, we use the 1% VaR calculation to determine the risk score of the portfolio

Calculation is:

**expected return - (2.326*volatility)= risk score**Example: 15 - (2.326*23)=38

*"Your portfolio scores a 38, meaning there's a 1% chance (worst case scenario) the portfolio could lose 38% or more in a 12 month period."*