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 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 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 measures the range of an investment's performance. The greater the standard deviation, the greater the investment's volatility.
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 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 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.
- 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.
Where do these numbers come from?
- Balance Sheet (snapshot of financials)
Assets = Liabilities + Shareholders’ Equity
- Income Statement (revenues & expenses during a specific period)
Net Income = (Total Rev + Gains) - (Total Exp + Losses)
- Cash Flow Statement (Cash inflows & cash outflows)
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- Operations (business activities, etc.)
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- Investing (Property Plant & Equipment, CAPEX)
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- 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)
- Valuation
- Profitability
- Liquidity
- Debt (Solvency)
- Efficiency