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Understand the Risk Factors

7 Common Types of Risks -

Risk Assessment of Mutual Fund

Commonly used approaches to assess risks of mutual funds include the standard deviation, beta and Sharpe ratio.

1. Standard Deviation

Standard Deviation measures the variability of a population of performance data and shows how much variation or dispersion from the average. A low standard deviation indicates that the data points tend to be very close to the mean and as such lower risk; a high standard deviation on the other hand indicates higher variation and higher risk.

1. Beta (β)

The beta (β) of a stock or portfolio is a number describing the correlated volatility of an asset in relation to the volatility of the benchmark that the asset is being compared to. It measures the systemic risk that cannot be diversified away. A beta of 1 indicates that the security's price will move with the market. Beta less (greater) than 1 means that the security will be less (more) volatile than the market. R-squared is often used along with the beta number. R-squared values range from 0 to 100. An R-squared of 100 means that all movements of a security are completely explained by movements in the index. A higher R-squared value (between 85 and 100) indicates a more useful beta figure.

2. Sharpe Ratio

Sharpe ratio measures risk-adjusted performance and is the return achieved per unit of risk taken. The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been.

Sharpe Ratio = (Expected Return – Risk-Free Rate) ÷ Standard Deviation

3. Sortino Ratio

Sortino Ratio is similar to Sharpe ratio that measures the risk-adjusted return of an investment but penalizes only those returns falling below a user-specified target (downside risk). An intuitive way to view downside risk is the annualized standard deviation of returns below the target.

Sortino Ratio =(Expected Return – Risk-Free Rate) ÷ Downside Variance

Most hedge funds aim for absolute returns and unlike traditional funds where there are benchmarks to compare to. Therefore, risk measures, such as the Sharpe ratio, that are applicable to traditional funds are not s to hedge funds, but instead Sortino ratio should be used.

General Risk-Return Spectrum for Mutual Funds:

iFund investment product risk rating is a qualitative and quantitative assessment of a single fund’s geographic and asset class focus, investment style and potential risk factors. At the conclusion of the due diligence, each investment product is classified according to the preset asset classification and risk rating scores, ranking from 1 to 6 (1 is the lowest risk, 6 is the most risky).

General Risk-Return Spectrum for Mutual Funds:




Risk Statement and Disclaimer:
By using this information, you confirm that you accept the Terms of Use as set out in https://www.ifund.com.hk. Investment involves risk. Past performance is not indicative of future performance. Fund prices may move down or up, may fluctuate dramatically, and may become valueless. It is as likely that losses will be incurred rather than profit made as a result of buying and selling funds. Some funds are denominated in RMB which are currently not freely convertible, and are thus subject to risks associated with RMB including RMB foreign exchange risk, RMB hedging risk, offshore RMB ("CNH") market risk and RMB trading and settlement of fund units risk. Funds which are invested in emerging markets and smaller companies may also involve a higher degree of risk and are usually more sensitive to price movements. Before making any investment decision, investors should carefully read the prospectus and the offering document for further details. Investors should undertake their own research and study before trade or invest. Investors should carefully consider whether trading or investments are suitable in light of their own financial positions and investment objectives, and understand that they shall be wholly responsible for their investments. Investors are advised to seek independent financial and professional advice before trade or invest. The information herein does not constitute investment advice, or an offer to sell, or a solicitation of an offer to buy any security, investment product or service nor a distribution of information for any such purpose.  The website contents are prepared and issued by Noble Apex Advisors Limited. Informational sources are considered reliable but you should conduct your own verification of information contained herein.  This website and advertisements contained herein have not been reviewed by the Securities and Futures Commission of Hong Kong.

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