Risk Efficiency

How Finiac Defines Risk Efficiency

Risk Efficiency (RE) tells you how well you’re trading risk for reward.

The number itself represents the Adjusted Sortino Ratio (more details below 👇)

RE can apply just as easily to portfolios as it does to assets.

Infographic explaining how to read Finiac's Risk Efficiency metric.

Why Risk Efficiency matters

Any asset whose value changes over time can be said to have a certain level of volatility. A few examples:

• Low volatility: precious metals or bonds. Their prices don’t tend to change very much on any given day.

• High volatility: Cryptocurrencies, as a class, tend to experience greater changes in price on any given day.

Our definition of “risk” is simple: the probability that you’ll lose money, either on a particular asset or on a portfolio as a whole.

RE, in Finiac, looks at the past year of returns and tells you how much of that risk has paid off in gains.

RE can apply just as easily to portfolios as it does to assets.

How to calculate Risk Efficiency

RE in Finiac is based on the Adjusted Sortino Ratio. Sortino is one of a few popular risk-reward calculations (the Sharpe Ratio is another).

Kenneth L. Grant, in his book Trading Risk, offered up this slightly adjusted version of the Sortino Ratio:

Graphic showing the equation for Kenneth L. Grant's Adjusted Sortino Ratio, presented in Finiac as Risk Efficiency.

We chose Adjusted Sortino because is prioritizes downside risk, which, when we’re talking about investing, is the only thing we’re actually worried about.

That is, volatility can go both ways—up or down—but we only worry about risk on the downside.

Risk Efficiency and dScore

dScore in Finiac tells you how much you can expect an asset to drop on the worst day in any given month.

Taken together, RE and dScore give you a clear-as-possible picture of what owning an asset will probably be like.