How to Measure the Performance of Your Portfolio and What Are the Key Metrics to Rely On When Choosing a Strategy (Part 1)

Forming a portfolio may become a tough challenge if you do not know how to assess the performance. Therefore we provided the key metrics that should be taken into account right beneath the performance graph. Let’s have a look at them in more detail:

CAGR (%) – Compound Annual Growth Rate Indicates how much your capital grows on average each year if the growth were consistent.

• The higher the CAGR, the better – it means your portfolio generates stable long-term returns.
• However, it’s important to consider risks – a high CAGR may come with high volatility.

Volatility (%) Measures how much the value of your portfolio fluctuates over time. It shows how often and how sharply the prices of assets in your portfolio rise and fall.

• High volatility means asset prices change frequently and significantly. This can bring high returns but also increases the risk of substantial losses.
• Low volatility means the portfolio value changes smoothly and predictably, reducing the likelihood of sharp drawdowns.

Sharpe Ratio Helps determine how effectively your portfolio generates returns relative to the risks taken. It indicates whether the return justifies the level of instability (volatility) in your investments.

• The higher the Sharpe Ratio, the better – it means your portfolio delivers more returns per unit of risk.
• If the ratio is low, the investments may be too risky for the returns they provide.

Sharpe Ratio is useful for comparisons:

• Two portfolios with the same return? Choose the one with the higher Sharpe Ratio – it's less risky.
• Two portfolios with the same risk level? Prefer the one that yields more profit.

Sortino Ratio Sortino Ratio is similar to Sharpe Ratio but with one key difference: it only considers “bad” fluctuations – those leading to losses.

• The higher the Sortino Ratio, the better – it means your portfolio generates good returns without experiencing severe drawdowns.
• If the Sortino Ratio is low, it signals that returns come with significant losses. Why is this important?
• Sharpe Ratio considers both upward and downward movements as risk.
• Sortino Ratio focuses only on declines because it doesn’t treat upward movements as risky.

Max Drawdown (%) Max Drawdown indicates how much your portfolio could fall from its peak to its lowest point over a given period.

• The lower this figure, the better – it means your portfolio hasn’t experienced significant losses.
• If Max Drawdown is high, it means your investments saw a major decline at some point. If two strategies have the same return, choose the one with the lower Max Drawdown – it is more stable and weathers crises better.

We hope this guide will help you select the optimal portfolio that suits your investment strategy. Stay tuned for the second part of the metrics overview to dive deeper in the portfolio analysis. Should you have any questions or suggestions – feel free to contact us via the Feedback button in your Personal account.