TIFIN Wealth

<a href="#h_8c4c8a86a5">Scoring each individual holding</a>

<a href="#h_ce3d3a53cf">Calculating the forward looking expected returns of each security</a>

<a href="#h_9aaca9a07f">Calculating the forward looking volatility of each security </a>

<a href="#h_2278692ec7">Calculating the risk score of the overall portfolio</a>

1. <a href="#h_8c4c8a86a5">Scoring each individual holding</a>
2. <a href="#h_ce3d3a53cf">Calculating the forward looking expected returns of each security</a>
3. <a href="#h_9aaca9a07f">Calculating the forward looking volatility of each security </a>
4. <a href="#h_2278692ec7">Calculating the risk score of the overall portfolio</a>

Determining Individual Holdings Return &amp; 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 &gt; 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):

1. US Large Cap forward looking return= 6.94%
2. ABC's beta is 1.65 
3. Now take 1.65*6.94% to determine ABC's forward looking return of 11.5%

1. Map the security to the appropriate asset class, in this case US Large Cap &gt; look at the forward looking returns per the asset class
 
 
 
2. Run a 5 year regression to identify the beta (how variable are the returns compared compared to US Large Cap):
 
 1. US Large Cap forward looking return= 6.94%
 2. ABC's beta is 1.65 
 3. 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:

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

Complete the above steps for each individual security in the portfolio

1. Take the daily volatility of ABC / daily volatility of US large cap
 
2. Then multiply the above ratio by the expected forward looking volatility of US Large Cap:
 1. 1.85*16.37%= 30%
 
3. Now, we use the formula to calculate the 1% VaR, or Risk score for ABC Stock
 1. 11.5 - (2.317*30)= 58
 
4. 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

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

1. We first calculate the expected return of the overall portfolio, which is simply a weighted average of the expected returns of the individual holdings
 
2. 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 
 

3. Now, we use the 1% VaR calculation to determine the risk score of the portfolio
 
 1. Calculation is: expected return - (2.326*volatility)= risk score
 1. 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."