By Mike McDaniel,
Chief Investment Officer
Once again, Riskalyze has taken a largely academic body of work and enhanced it to deliver practical insights. For years, advisors have leaned on the Sharpe Ratio to help analyze investments, despite its practical-use shortcomings.
At last year’s Summit we released the Riskalyze GPA®, an efficiency metric for portfolios and models. Advisors have used the Riskalyze GPA™ to contrast the efficiency of two portfolios, or models, answering questions like “both of these models have similar Risk Numbers, which one is better?”
Advisors were quick to demand the Riskalyze GPA at the holdings-level, and in preparation for some exciting announcements at this year’s Fearless Investing Summit, our Risk and Methodology team got busy working.
Today, we are thrilled to announce enhanced Riskalyze GPA analytics, including holdings-level GPAs. Now advisors can answer questions like “how can I easily determine the best investment in a given sector or category?”
Riskalyze GPA is a quantitative expression of the efficiency of an investment, strategy, or portfolio with respect to risk-adjusted returns. This clearly demonstrates, in a single number, the relationship between historical performance, and downside risk. The primary drivers of the Riskalyze GPA include returns (geometric average returns vs Sharpe’s discrete arithmetic returns) and downside risk, and GPA also takes things like dividends and expense ratios into consideration. Based on months of feedback, additional analysis and our desire to deploy our GPA at the security-level in addition to the portfolio level we adjusted the median GPA a bit. This creates a more diverse distribution of GPAs across our scale from 1.0 – 4.3 and allows additional granularity for advisors and portfolio managers alike. Our algorithm also properly accounts for risk-free rates used in risk-adjusted returns, another shortfall of other metrics like Sharpe Ratio.
The Riskalyze GPA ranking system elegantly highlights how a given investment, model or portfolio stacks up against others of a similar risk exposure.