Definitions What is the risk index and why is it used? How is relative strength calculated? What is the Wilshire 5000?

What is the risk index and why is it used?    [ top ]

The risk index for individual SSR stocks is calculated by dividing the 36-month annualized standard deviation of return for the stock by the 36-month annualized standard deviation of return for the Wilshire 5000 index. The baseline value for the index is 1.00. Values above 1.00 indicate greater risk than the index. Values below 1.00 indicate less risk than the index. In simplified terms, the higher the number, the more likely the stock’s price is going experience bigger increases and declines than the underlying benchmark.

At the heart of the risk index is a stock’s standard deviation, or the variance of its returns. If you were to plot a stock’s returns for the past 36 months from the largest to the smallest, you would see that 68% of the monthly percentage changes in its price were clustered fairly close together. Large positive and negative returns would be fewer in number. What standard deviation measures is the spread of returns. In other words, do most of the returns fall within the –5% to +5% range, or a wider range—say, –15% to +15%? However, looking at the range of returns—simply taking the difference between the two extremes (–5% – 25% = –30%, or 30%)—would not show how tightly other returns were clustered. For example, consider the following two series of returns: –20%, 0%, 0%, 0%, +20%; and –20%, –19%, 0%, +19%, +20%. They each have the same range, but not the same volatility. The first series of returns will result in 4% higher wealth.

Volatility measurements tend to be fairly stable over the long term, but there is wide variation in the shorter term. Because portfolio management decisions may depend on current volatility, it is important to keep the measurement period short enough to pick up trends, but not so short that it picks up large fluctuations that are momentary. The three-year annualized standard deviation calculated using monthly periods is a good compromise time frame for making comparisons.

We display the risk index instead of the standard deviation because it provides more context about the volatility of a particular security relative to the market. Standard deviation is calculated as a percentage number, but it does not immediately tell you whether a stock is more risky or less risky than the underlying benchmark. A value above 1.00 or below 1.00 provides this context.

How is relative strength calculated?    [ top ]    

The calculation looks at the price movement after the highest closing price the stock achieved since being added to the SSR portfolio relative to the movement of the Wilshire 5000 since the close of the day on which the stock reached its high.

The calculation for the relative strength value is as follows:

What is the Wilshire 5000?    [ top ]

The Wilshire 5000 total market index represents the broadest index for the U.S. equity market, measuring the performance of all U.S.-headquartered equity securities with readily available price data. The index was originally named after the nearly 5,000 stocks it contained when it was first created, but it has grown to include over 6,500 issues (reflecting the growth in U.S. equity issues as a whole).