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Last active January 6, 2022 05:00
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- Alpha

Alpha measures the difference between an investment's expected returns based on its beta and its actual returns. A positive alpha indicates the investment has performed better than its beta would predict. A negative alpha indicates an investment has underperformed, given the investment's beta.

- Beta

Beta measures an investment's sensitivity to market movements. A beta greater than one indicates the investment is more volatile than the market. If beta is less than one, the investment is less risky than the market.

- R-Squared

R-Squared reflects the percentage of an investment's movements that are explained by movements in its benchmark index. A higher R-squared indicates a more useful beta figure. A lower R-squared (less than 70%) is less relevant to the investment's performance.

- Standard Deviation

Standard Deviation measures the range of an investment's performance. The greater the standard deviation, the greater the investment's volatility.

- Sharpe Ratio

Sharpe Ratio indicates the reward per unit of risk by using standard deviation and excess return. The higher the Sharpe ratio, the better the investment's historical risk-adjusted performance.

- Upside Capture Ratio

Upside Capture Ratio measures a manager's performance in up-markets relative to the index. A value over 100 indicates that an investment has outperformed the benchmark during periods of positive returns for the benchmark.

- Downside Capture Ratio

Downside Capture Ratio measures the manager's performance in down-markets relative to the index. A value of less than 100 indicates that an investment has lost less than its benchmark when the benchmark has been in the red.

- Drawdown

  • Maximum is the peak-to-trough decline during a specific recorded period of an investment. It measures the largest percentage drawdown that has occurred in a certain time period.

Financial Ratios When Buying Stocks

Where do these numbers come from?

  1. Balance Sheet (snapshot of financials)
Assets = Liabilities + Shareholders’ Equity
  1. Income Statement (revenues & expenses during a specific period)
Net Income = (Total Rev + Gains) - (Total Exp + Losses)
  1. Cash Flow Statement (Cash inflows & cash outflows)
    1. Operations (business activities, etc.)
    1. Investing (Property Plant & Equipment, CAPEX)
    1. Financing (cash flow between a biz and creditors 10-K)

How to evaluate a company (financial Ratios)

  • Price-to-Earnings Ratio (P/E Ratio)
  • Valuation Ratio
  • P/E Ratio = Company’s share price to its EPS
  • Relative value of a company’s shares apples to apples
  • Formula: Market Value Per Share / EPS
  • Live Example
  • Healthy P/E Ratio* = 15 or lower

Financial Ratios When Buying Stocks (categories)

  1. Valuation
  2. Profitability
  3. Liquidity
  4. Debt (Solvency)
  5. Efficiency
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