Q14: What is Beta and VAR in the Portfolio Panel? How to use them?

A: We study the correlation of the whole portfolio and the market (S&P 500 index) to get the Beta, which measures the sensitivity of the portfolio to market movement. For example, if Beta is 1.5, it means that, on average, if the market moves up 1%, the portfolio moves up1.5%; if the market moved down 1%, the portfolio would move down 1.5%. Therefore, Beta is a relative risk measure.

VAR stands for Value At Risk, currently a widely used market concept. VAR is a quantifiable absolute risk measure, in units of dollars per day. Tradetrek uses the daily 95% confidence VAR convention: in a single trading day, there is a 95% probability that the portfolio will not lose more than the VAR. For example, if the Tradetrek Portfolio Panel shows that the VAR is $800, then you can assume 95% probability that you will not lose more than $800 in one day.

How to use Beta: if you believe that the market will go up, you can hold a portfolio or structure a portfolio by adding or removing stocks or adjusting shares so that the Portfolio Panel shows a POSITIVE Beta. On the other hand, if you think the market will go down, to reduce risk, you should adjust your portfolio so that the beta is small or negative.

How to use VAR: it is important always to keep your VAR at an acceptable level by adjusting your portfolio holdings. A rule of thumb is that the VAR should be always less than 2% of your total investment, so it is absolutely necessary to keep the VAR under 5% of your capital under all circumstances.