How We Calculate Portfolio Metrics
Transparent by design
At Portfolio Genius, we believe in complete transparency about how we measure your portfolio's performance and risk. This page explains the methodologies behind our key metrics, so you can understand exactly what the numbers mean and how they're calculated.
Our calculations follow industry-standard methodologies used by professional portfolio managers and financial institutions, with some enhancements to handle real-world scenarios like deposits and withdrawals.
- 01Sharpe Ratio
- 02Volatility (Standard Deviation)
- 03Beta
- 04Alpha
- 05Maximum Drawdown
- 06Data Sources and Time Periods
- 07Limitations and Considerations
Sharpe Ratio
The Sharpe ratio measures your portfolio's risk-adjusted return. It tells you how much excess return you're getting for each unit of risk you're taking. A higher Sharpe ratio indicates better risk-adjusted performance.
- Rp = Portfolio return (annualized)
- Rf = Risk-free rate (we use 4% annually, based on current Treasury yields)
- σp = Standard deviation of portfolio returns (annualized)
Our Implementation
- Data Period: We use up to 365 days of historical portfolio values
- Minimum Data: At least 30 daily data points are required for a reliable calculation
- Annualization: Daily Sharpe ratio is annualized by multiplying by √252 (trading days per year)
- Cash Flow Adjustment: We use the Modified Dietz method to account for deposits and withdrawals
Standard return calculations can be distorted when you add or withdraw money from your portfolio. A $10,000 deposit would look like a 10% gain if not handled properly. We use the Modified Dietz method, which adjusts for external cash flows by assuming they occur mid-period:
Where CF is the net external cash flow (deposits minus withdrawals) during the period.
Interpreting Your Sharpe Ratio
- < 0: Returns below the risk-free rate
- 0 - 1: Suboptimal risk-adjusted returns
- 1 - 2: Good risk-adjusted returns
- 2 - 3: Very good risk-adjusted returns
- > 3: Excellent (rare for diversified portfolios over extended periods)
Volatility (Standard Deviation)
Volatility measures how much your portfolio's returns vary over time. Higher volatility means larger swings in value, both up and down. It's expressed as an annualized percentage.
- Ri = Individual daily returns
- R̄ = Mean daily return
- n = Number of observations
- √252 = Annualization factor (trading days per year)
Typical Volatility Ranges
- 5-10%: Conservative (bond-heavy portfolios)
- 10-15%: Moderate (balanced portfolios)
- 15-20%: Growth-oriented (stock-heavy portfolios)
- 20%+: Aggressive (concentrated or speculative portfolios)
Beta
Beta measures how sensitive your portfolio is to market movements, using the S&P 500 as the benchmark. A beta of 1.0 means your portfolio moves in line with the market.
- Cov(Rp, Rm) = Covariance between portfolio and market returns
- Var(Rm) = Variance of market returns
Our Implementation
For portfolio-level beta, we calculate a weighted average of the individual position betas, where weights are based on each position's percentage of total portfolio value:
Where wi is the weight and βi is the beta of each position.
Interpreting Beta
- β = 1.0: Moves exactly with the market
- β > 1.0: More volatile than the market (amplifies market moves)
- β < 1.0: Less volatile than the market (dampens market moves)
- β < 0: Moves opposite to the market (rare, e.g., inverse ETFs)
Alpha
Alpha represents the excess return of your portfolio compared to what would be expected given its beta. Positive alpha means you're outperforming the risk-adjusted benchmark.
- Rp = Actual portfolio return
- Rf = Risk-free rate
- β = Portfolio beta
- Rm = Market (S&P 500) return
Interpreting Alpha
- α > 0: Outperforming the risk-adjusted benchmark
- α = 0: Performing exactly as expected for the risk taken
- α < 0: Underperforming the risk-adjusted benchmark
Maximum Drawdown
Maximum drawdown measures the largest peak-to-trough decline in your portfolio value. It tells you the worst loss you would have experienced if you bought at the peak and sold at the subsequent lowest point.
- We track the running maximum value and calculate the drawdown at each point, then report the maximum observed drawdown over the measurement period.
Typical Maximum Drawdowns
- 5-10%: Conservative portfolios in normal markets
- 10-20%: Balanced portfolios in normal markets
- 20-30%: Stock-heavy portfolios in market corrections
- 30-50%+: Aggressive portfolios in bear markets
Historical maximum drawdown may not predict future drawdowns. Market conditions can change, and future drawdowns could be larger than those observed in your historical data.
Data Sources and Time Periods
Price Data
All price data is sourced from Tiingo, a professional-grade financial data provider. We use adjusted close prices that account for stock splits and dividends.
Time Periods
- Sharpe Ratio: Rolling 365-day period (minimum 30 days required)
- Volatility: Same as Sharpe ratio calculation
- Beta/Alpha: Based on available position data and market comparison
- Maximum Drawdown: Since portfolio inception or last 365 days
Update Frequency
- Portfolio values are recorded daily after market close
- Metrics are recalculated each time your portfolio is updated
- New portfolios need at least 30 days of history for Sharpe ratio calculation
Limitations and Considerations
- Past performance does not guarantee future results
- Risk metrics are estimates based on historical data
- Market conditions can change rapidly, affecting all metrics
- The risk-free rate assumption (4%) may not reflect actual rates at all times
- Beta calculations assume historical relationships will persist
- These metrics should be one input among many in your investment decisions
Our metrics are designed to help you understand your portfolio's characteristics, but they are not predictions of future performance. Always consult with a qualified financial advisor before making investment decisions.
Get in touch
If you have questions about our methodology or notice any discrepancies in your metrics, we're here to help:
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