What are the best technology stocks with the best Risk - Return Ratio ? And which of these stocks meet your degree of risk ?
For this analysis I will use a three-year time frame for convenience and use a return and standard deviation with the same time frame.
Let's the graphs speak .
But first let’s look at the performance of the stocks compared to SPY.
Many novice investors and traders when they start betting on the stock market are often attracted by the gains while neglecting the risks . This is a big mistake that many people make .
With a simple Risk - Return basic analysis you can already see which stocks to invest in or trade based on your risk attitude . This small basic analysis serves to make you aware of what you are getting into and what dangers you may be putting your hard-earned savings at risk .
Let's take a look at the three-year average return
Now let's look at stocks according to their risk or volatility using the three-year standard deviation
And finally, our Risk - Return chart
We sort our values in a table and then draw our conclusions
Et voilà!!!
Considering the S&P 500 (SPY) as the benchmark, the best ratio stocks are NVDA AVGO ORCL AAPL and MSFT. The choice of stocks varies depending on the risk profile each of us has. NVDA is the stock with the highest volatility and return, suitable for an investor or trader with a high risk appetite. For a risk-averse person who wants to invest some of his or her savings in stocks with a long-term perspective, targeting an ETF such as SPY could be a solution. For someone who tends toward moderate risk, MSFT and APPL might be a good investment.
It depends on each of us how much we are willing to risk to get the desired return. The higher the return, the higher the risk.
But before venturing out and making your own bets, it is always best to do your own due diligence and contact your trusted advisor.
Disclaimer : The information provided in this article is strictly to educational and entertainment purpose only and does not constitute investment advice, financial advice, business advice, or any other type of advice, and you should not consider the contents of this article as such. NotOnlyEquity does not recommend the purchase, sale or holding of stocks, bonds, derivatives or any other assets. Before making any investment decision, you should conduct your own due diligence and consult your financial advisor.
Correlation, in the finance and investment industries, is a statistic that measures the degree to which two securities move in relation to each other.
Correlation shows the strength of a relationship between two variables and is expressed numerically by the correlation coefficient. The correlation coefficient’s values range between -1.0 and 1.0.
A perfect positive correlation means that the correlation coefficient is exactly 1. This implies that as one security moves, either up or down, the other security moves in lockstep, in the same direction. A perfect negative correlation, -1, means that two assets move in opposite directions, while a zero correlation implies no linear relationship at all.
Negative correlations of investments are used with portfolio risk management to decide how to allocate assets. Portfolio managers and investors believe that some of the risk associated with the portfolio would be diversified if they can assemble a portfolio of negatively correlated assets. The strategy of assembling negatively correlated assets might be appropriate, for example, if a portfolio manager is forecasting a market crash or in times of high volatility and combine assets to produce a low volatility portfolio. Using negatively correlated investments helps to reduce the overall volatility of the portfolio.
Investors who wish to mitigate risk can do so by investing in non-correlated assets
While finding perfectly uncorrelated stocks is pretty much impossible, you can aim to have a mix of stocks with varying correlations. This will reduce the volatility and the maximum drawdown of the portfolio, factors that are critical for prudent portfolio construction. It will also reduce the correlation to market benchmarks such as the S&P 500.
Last important point : Correlation is not a static value; it evolves over time. Regularly assessing and updating correlation matrices can help in identifying potential issue and adapting strategies accordingly. A lack of monitoring can lead to underestimating the risks and the potential impact on the portfolio.
Now let’s look at a real application . I have randomly selected 14 stocks endowed with solid competitive advantages or Moat as Buffet calls them.
Let’s see them graphically .
Correlation is just one of many tools available to the investor and is used to examine the diversification risk of one’s portfolio.
As always, it is necessary to conduct further research and make appropriate assessments before committing your capital.
A value investor’s view of the risk of an equity investment using the Novo Nordisk case ($NVO)
Two of the most popular risk measures used by banks and other financial institutions around the world: the VaR and CVaR.
A more dynamic use of these two metrics
Monte Carlo simulation : building model of possible results
In the world of finance, understanding and managing risk is crucial for investors who want to safeguard their assets.
Risk management is crucial in portfolio optimization and stocks analysis when talking about investment.
VaR and CVaR are the most widely used risk measures and it’s a standard measure used by banks and financial institution in general.
Having been a value investor for several years, in this article we apply these two metrics to a real case involving Novo Nordisk stock from a “value” perspective.
After doing our due diligence and establishing a value for which we are willing to buy the stock, my final question is always: What is my risk-return ratio? And what is the MOS that could convince me to buy NVO?
What is Var .
Value-ar-risk is one of the most widely used measures of risk and has become a standard measure of risk used by banks and other financial institutions around the world
Commercial banks , for example, typically calculate a daily VAR, asking themselves how much they can lose in a day.
VAR estimates the worst-case scenario or the potential downside risk of an investment.
It calculates the maximum expected loss over a defined period, under normal market conditions, at a given confidence level.
The confidence level are 90%, 95%, or 99%. Let’s see what that means: If a stock has a VaR of -5% with a confidence level of 95%, it means its losses will not exceed -5% with a 95% probability in a given day based on historical values. Let’s practice a concrete case with the Novo Nordisk stock — $NVO
How to read it for 95%: Novo stock loss will not exceed -2.68 % on a single day with a confidence level of 95% based on its historical values over the last 3 years.
What is CVaR
Conditional Value at Risk (CVaR), also known as the expected shortfall, is a risk assessment measure that quantifies the amount of tail risk an investment has. CVaR is derived by taking a weighted average of the “extreme” losses in the tail of the distribution of possible returns, beyond the value at risk(VaR) cutoff point. Conditional value at risk is used in portfolio optimization for effective risk management.
The use of CVaR as opposed to just VaR tends to lead to a more conservative approach in terms of risk exposure.The choice between VaR and CVaR is not always clear, but volatile and engineered investments can benefit from CVaR as a check to the assumptions imposed by VaR.
Generally speaking, if an investment has shown stability over time, then the Value- at -Risk may be sufficient for risk management in a portfolio containing that investment. However, the less stable the investment, the greater the chance that VaR will not give a full picture of the risks, as it is indifferent to anything beyond its own threshold.
Let’s plot Novo CVaR
We read NVO CvAR in the same way we interpreted VaR : NVO loss will not exceed -3.91% on a single day with a confidence level of 95% based on its historical values over the last 3 years.
CVaR in real life CVaR must always be greater than VaR because CVaR is based on the worst-case scenarios of returns, which is reflected in the results shown. Safer investments (large-cap US stocks or bonds) rarely exceed VaR significantly. More volatile asset classes, such as small-cap US stocks, emerging market stocks, or derivatives, can have CVaRs that are many times greater than VaRs. Investors prefer low CVaRs.
Rolling VaR and CVaR
When we use a rolling window to compute VaR and CVaR, it provides a dynamic view of how the risk of maximum potential loss changes over time. For instance, a rising VaR and CVaR might indicate increasing risk in the asset.
In the case of NVO we see that the current VaR and CVaR is below the average mean threshold of both indicators indicating moderate risk . We have a VaR near 2.4% of against the average of 2.68%.
Ditto for CVaR.
Monte Carlo simulation
The Monte Carlo simulation example involves generating random returns based on the historical mean and standard deviation. The histogram shows the distribution of simulated portfolio or stock returns, with the VaR and CVaR threshold at the 95% confidence level marked by a red dashed line. This visualization helps to understand the potential range of future returns and the likelihood of exceeding the VaR and CVaR. Value at Risk (VaR) is a vital metric for assessing financial risk, offering a clear quantification of potential losses.
In simple terms, Monte Carlo model is used to predict the probability of different outcomes. The outcome of this model will explain the impact of risk and uncertainty in prediction and forecasting models. These risks will be presented in form of CVar and Var values.
There is a 95% probability that the stock will not lose more than -14.16% (VaR) over a given period of time (100 days), based on the Monte Carlo simulation; or the stock will not lose more than -20.82% (CVaR).
Conclusion
With a closing prince of about 133 dollars and an intrinsic value of about 80 dollars, the price of NVO is too expensive at the moment .
I really like Novo Nordisk . It is a quality stock with a great Moat that I would like to have in my stock portfolio, however, a strategy is necessary.
Then what to do ? Wait for the stock to decline or get paid by selling options in the expectation of a correction ?
It is in choosing the second scenario that VaR and CVaR come in handy , because we can try to plan for a price at which we are willing to buy the stock and get paid while waiting .
VaR and CVaR are very useful in establishing confidence levels within which to place our bet.
In finance, risk refers to the degree of uncertainty and/or potential financial loss inherent in an investment decision.
How is risk usually measured?
There are many tools for measuring it, but the basic ones are:
- Standard deviation
- Skewness
- Kurtosis
- Drawdown
Let's see them applied to TESLA stock
Risk analysis also is based on two fundamental concepts that is return and probability
Let's put them on a graph
This graph represents the daily performance of TESLA . We see that over a period of three years the return has fluctuated from a low of about -12% to a high of about 15%
But now I would also like to see its distribution by histogram
Histograms of daily returns are valuable to help investors to identify patterns, such as the range of daily returns of an asset over a certain period, indicating its level of stability and volatility.
In case of TESLA , we can see some extreme values that are distant from the mean,,indicating the presence of outliers in the positive and negative range of the distribution.
Now let us look at the standard deviation of Tesla , or rather its historical volatility
Historical Volatility
Standard deviation or Historical Volatility quantifies the variability of a stock's daily return .It indicates the level of risk associated with investing in that particular stock. A security with a high volatility of daily returns, characterized by a high standard deviation, is considered riskier than one with a low volatility of daily returns, represented by a low standard deviation.
TESLA is a stock with high volatility with values in the past ranging from a low of 20% to highs of more than 80%.
Not for the faint of heart
Skweness
In finance, the concept of skewness is used in analyzing the distribution of investment returns.
Positive skewness of a distribution indicates that an investor can expect frequent small losses and few large gains from the investment. Positively skewed distributions of investment returns are generally more desired by investors, as there is some likelihood of huge profits that can cover all the frequent small losses.
The 3 Year average of TESLA is positive .
Kurtosis
In finance, kurtosis is used as a measure of financial risk. A large kurtosis is associated with a high risk for an investment because it indicates high probabilities of extremely large and extremely small returns. On the other hand, a small kurtosis signals a moderate level of risk because the probabilities of extreme returns are relatively low. Kurtosis is a measure of the "tailedness" of a probability distribution. A high kurtosis indicates that the distribution has a higher probability of extreme values, or "fat tails," while a low kurtosis indicates a lower probability of extreme values, or "thin tails." This metric can be useful in risk management to identify and quantify the degree of tail risk in a portfolio or investment. A higher kurtosis value can indicate that an investment is more risky, as there is a higher probability of extreme losses.
TESLA has a kurtosis greater than 3
(Note : Python automatically calculates excess kurtosis, means the result in graph was subtracted by 3)
Historical Drawdown
Drawdown is the maximum loss a trader or an investor might experience in a given time horizon.
TESLA drawdown reached a minimum of 70%
In short : Tesla is a highly speculative stock with very high volatility and potentially high drawdowns .
As a good value investor I always stress the importance of trading or investing with serious consideration of one's margin of safety (MOS).
Consequently if in the future I wanted to decide to enter and buy TSLA , I would wait for some major correction.
Nel mondo della finanza, la comprensione e la gestione del rischio sono fondamentali per gli investitori che intendono salvaguardare il proprio patrimonio duramente guadagnato.
La gestione del rischio comporta l'identificazione e l’analisi del rischio in un investimento e la decisione se accettare o meno tale rischio dati i rendimenti attesi per l'investimento. Tra le varie misurazioni utilizzate le due più importanti nella analisi finanziaria sono il VaR o Value at Risk , e il CVar Conditional Value at Risk .
Che cos'è il VaR ?. Il Value at Risk quantifica il rischio di perdite potenziali di un investimento in un periodo di tempo, utilizzando metodi statistici per calcolare un livello di confidenza. Il livello di confidenza è del 90%, 95% o 99%. Vediamo cosa significa: Se un'azione ha un VaR di -5% con un livello di confidenza del 90%, significa che le sue perdite non supereranno il -5% con una probabilità del 90% in un determinato giorno sulla base dei valori storici.
Il limite del VaR è che si si tratta di uno strumento instabile e difficile da usare numericamente quando le perdite non hanno una distribuzione gaussiana.
Ha la tendenza ad essere troppo ottimista ,per questo viene usato , insieme al suo complementare Cvar, che può essere maggiormente utile al fine di comprendere al meglio lo scenario totale.
Che CVaR? Il Conditional Value at Risk è una metrica per stimare le perdite attese negli scenari peggiori.
CVaR nella vita reale è maggiore del VaR perché il CVaR si basa sugli scenari di rendimento peggiori . Gli investitori preferiscono CVaR bassi. Tuttavia, gli investimenti con il maggior potenziale di rialzo hanno spesso CVaR elevati.
Differenze tra VAR e CVAR: Il CVAR fornisce una rappresentazione del rischio migliore perchè è una media di tutte le perdite possibili superiori al VAR, mentre il VAR fornisce soltanto una soglia senza considerare le escursioni di prezzo più estreme anche se più rare.
Utilizziamolo nelle vita reale usando uno scenario di confidenza 95 e applichiamolo al titolo Apple .
VaR = -0.0269
CVaR = -0.0376
Come leggerlo : La perdita del titolo Apple non supererà il -2,69% nel caso del VaR e non supererà il -3,76% nel caso del CVaR in un singolo giorno con un livello di confidenza del 95% in base ai valori storici degli ultimi 3 anni.
In soldoni le probabilità di perdere più del 3,76% in un singolo giorno non superano il 5%.
Diamo ora alle due metriche una visione più vivace.
L'utilizzo di una finestra mobile (Rolling Window) per calcolare il VaR o il CVar fornisce una visione dinamica di come il rischio di perdita massima potenziale cambia nel tempo.
Vediamo il VaR :
E ora il CVaR:
Interpretazione: livelli crescenti di VaR e CVaR potrebbero indicare un aumento del rischio dell’attività.
In questo caso sia VaR e CVaR indicano valori sopra la media indicando un rischio moderato.
Il put-call ratio è un popolare indicatore di sentiment che analizza il numero totale di opzioni put negoziate rispetto alle opzioni call in un determinato giorno o settimana
Il rapporto put-call mira a misurare l'ottimismo o il pessimismo del mercato sulla base della domanda di opzioni. Un rapporto put-call alto significa che sono state negoziate più put che call e implica un sentimento più ribassista, mentre un rapporto basso è considerato rialzista.
Visualizziamo ora l'indicatore con un grafico a barre per vedere qual'è il sentiment di mercato .
Qual'è il sentimet di mercato ?
Da questo grafico notiamo che con un put-call ratio superiore a 1 il sentiment di mercato a partire da luglio è negativo.
