To identify a well-paying job, it’s more important to consider the hourly rate than the weekly/monthly income. That’s because the hourly rate represents the profit received for every hour/minute worked on the job.
Earning an income from investments is a bit different because it’s not a direct tradeoff with time spent. In fact, an investor in, say, a stock, makes money without having to spend any of their time on the job. That isn’t to say that the profits are free, but they’re instead received in exchange for the risk involved – this is the risk score.
Unfortunately, it is hard to quantify how much risk we are actually taking when investing in the stock market. Most individuals lack the tools to calculate the risk score of an investment, which is why we have created them to help you minimize the risk and maximize profits.
What is the portfolio risk?
An investment risk is the probability of losing money when making an investment. Because the markets are very unpredictable, the risk is relatively high when investing in a single asset. This is why it’s more advisable to create a portfolio of diverse assets to lower the risk and protect against volatility.
While still difficult to determine the risk of an entire portfolio, it’s a lot easier when you have the tools and know how to use them effectively. piScreener uses already recognised tools for establishing the portfolio risk and combines them with others to provide a reliable risk score analysis that will help you find the most ideal investments.
How eToro Calculates Risk Score
To learn more about eToro’s system of risk scoring, you can read this article by the company explaining its method. Basically, it measures standard deviation (SD) to determine how sharply the value of that investment changes over time. The sharper the deviation, up or down, the more volatile the investment and the riskier it may be considered.
How piScreener calculates risk score
Standard deviation is just one measure used by piScreener to calculate risk scores, while including the alpha, beta, Sharpe ratio, drawdown, and more. Further, our service uses algorithms to assess the data and compare different portfolios. This provides a more in-depth analysis of the portfolios and indicates the best performer(s).
How to use piScreener
Now that we have a method to calculate the risk score, we can modify the portfolio (read instructions in the app) and see how the risk score would adjust to that. For instance, we can see which actions we need to take to reduce our risk score from 6 to 5. And you can analyze your current position(s) and see which one(s) is mostly contributing to the risk.
Why Do We Care About Risk Scoring?
When choosing between, say, two stocks, the risk involved should match the expected returns.
For example, if the risk of investment A is three times higher than investment B, then I would also expect that investment A would provide 3 times more profit than investment B. On the other hand, when the risk is low it should increase confidence to invest an even larger amount of money, therefore increasing my total returns.
This shows how essential a risk score analysis is because it determines the final decision on any investment. As popular investors, reducing risk should allow you to enter specific lists which will attract new copiers. Every new copier is very valuable for a popular investor, thus it is essentially like making free money just by adjusting the risk.
Conclusions
Optimizing the risk score of your portfolio will attract more copiers to your portfolio as well as reduce the number of copiers leaving due to high volatility. This should have a drastic impact on your performance and increase your profits as a popular investor (PI).
Although the piScreener risk score does not perfectly match with eToro risk score, it provides a useful tool for investors who want to reduce their risk scores without impacting the total return. And with the power of compounding, you could double your money just by finding a better risk/reward ratio.