Portfolio risk estimates
What is this risk estimate?
When you first sign up for an investment account, we recommend a portfolio based on information you provide about your financial situation and objectives. We use our risk model to compare the volatility of the portfolio you’re using to the volatility of the portfolio that we recommended for you.
We want to give you the tools to decide whether your portfolio is appropriate for your investing objectives, so you’ll see a section in the Edit Portfolio screen that tells you whether your portfolio is riskier, less risky, or about at the level of risk we recommend. If the volatility of your portfolio is significantly higher or lower than the volatility of your recommended portfolio, we’ll let you know in this section.
How do you calculate this risk estimate?
We measure the volatility, or “riskiness,” of your portfolio using our proprietary risk model. Note that our risk model is designed to give estimates of long-term risk, not necessarily the volatility that may happen in the short-term.
A risk model has two main parts: estimates of the volatility of each individual fund you hold, and the correlation between those funds. Volatility measures how much prices tend to move — the more frequent and/or large the price movements, the higher the volatility. Correlation measures how much a pair of funds moves together in price, whether in the same direction or opposite directions.
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