Journal of Finance and Investment Analysis

Description of A New Method for Measuring Directional Risk in Investment Portfolios

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• Abstract

   

  This article describes a single financial ratio (“Optimized Directional Risk Ratio”) which reflects both an instrument’s downside risk as well as its overall return. By using the ODRR, investors and fund managers can more readily and precisely perceive which combinations of financial instruments, and in which proportions, stand to maximize returns while minimizing the investor’s risk. The ODRR can be calculated for any given time period of two months or more where there is at least one month with an observed positive return for a financial instrument, and one or more months of negative returns. Two-year, three-year, and five-year timeframes are logical time periods for calculation of the ODRR.

   

  JEL classification numbers: G110.

  Keywords: Risk measurement, Portfolio risk, Risk/reward, Optimized Directional Risk Ratio, Sharpe Ratio, Holmes Ratio.