TL;DR
Portfolio risk refers to the likelihood of investors' assets losing value and is measured by three main methods: Value at Risk (VaR), maximum drawdown, and volatility. For example, if a portfolio's 1-day VaR is 50,000 TL at a 95% confidence level, investors know there is a low probability of losing more than 50,000 TL in that period.
8 min readRisk matters as much as return. Three key metrics are used to measure portfolio risk: Value at Risk (VaR), maximum drawdown, and volatility. Each captures a different risk dimension.
Volatility
Measured by standard deviation, volatility shows how much returns deviate from the mean. For BIST stocks, 21-day annualized standard deviation is commonly used. Low volatility strategies are based on this metric.
Maximum Drawdown
The largest peak-to-trough decline in portfolio value. The most important risk metric psychologically because it measures actual loss experience. A -30% drawdown requires a +43% gain to break even.
Value at Risk (VaR)
Estimates the maximum loss at a given confidence level (95% or 99%) over a given period. '95% VaR = -5%' means loss may exceed 5% once in 20 days. VaR doesn't fully capture tail risks — supplement with Conditional VaR (CVaR).
Which Metric to Use?
Use volatility for daily risk tracking, drawdown for long-term portfolio evaluation, VaR for institutional risk management. Sharpe and Sortino ratios combine these with returns for risk-adjusted performance.
Calculate your portfolio's risk metrics in the simulator.
Go to Simulator →Related articles: Portfolio Management Guide, MPT, Diversification, Rebalancing.
Frequently Asked Questions
What is Value at Risk (VaR)?
VaR represents the expected maximum loss of an investment portfolio over a specific time frame (usually 1 day) at a certain confidence level (e.g., 95%). For example, if a portfolio has a 1-day VaR of 50,000 TL, it is expected that the investor will not lose more than 50,000 TL with 95% confidence.
How is maximum drawdown calculated?
Maximum drawdown refers to the decline from the highest value to the lowest value of an investor's portfolio. For instance, if a portfolio drops from 1,200,000 TL to 1,000,000 TL, it has experienced a drawdown of 16.67%.
What is volatility?
Volatility measures how much the price of an asset fluctuates. Assets with high volatility, such as FROTO and GARAN, carry greater risk for investors.
How can portfolio risk be minimized?
Portfolio risk can be minimized through diversification of assets. A portfolio containing stocks from different sectors can reduce unsystematic risks and provide a more balanced performance.
What is the importance of risk measurement?
Risk measurement is a critical process for investors to make informed decisions. Considering market fluctuations, risk measurement methods are vital for minimizing potential losses.
This content does not constitute investment advice. Past performance is not a guarantee of future results. Make your investment decisions based on your own risk profile.
