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How much could my portfolio lose in a bad year, and which holdings drive it?
Educational scenarios, not live market estimates. Returns, volatility, beta, and sample correlations are assumptions. VaR is a normal-distribution loss threshold over 12 months, not a maximum loss; actual losses can be larger. Undefined ratios and measures needing historical returns are shown as N/A. Rating thresholds are illustrative, not suitability advice.
| Asset | Allocation | Value | Weight |
|---|---|---|---|
| VTI | 40.00% | $40,000 | 40.0% |
| VTIAX | 20.00% | $20,000 | 20.0% |
| BND | 30.00% | $30,000 | 30.0% |
| VNQ | 10.00% | $10,000 | 10.0% |
| Metric | Value | Reference point | Status |
|---|---|---|---|
| Sharpe ratio | 0.11 | > 1.0 | Outside reference |
| Portfolio beta | 0.69 | 0.8 - 1.2 | Near reference |
| Volatility | 11.3% | < 15% | Inside reference |
| Diversification ratio | 1.19 | > 1.2 | Near reference |
| Max drawdown | N/A | < 20% | Unavailable |
| Treynor ratio | 0.02 | > 0.1 | Outside reference |
| Alpha (CAPM) | -0.53% | > 0% | Near reference |
The lab starts with $40,000 in a total US stock fund, $20,000 in an international stock fund, $30,000 in a bond fund, and $10,000 in a real estate fund. Expected return is 5.70% a year. The weighted average of the four volatilities is 13.45%, but the sample correlations bring portfolio volatility down to 11.33%, a diversification ratio of 1.19. Beta is 0.69. With a 4.5% risk-free rate, the Sharpe ratio is 0.11: 1.2 points of return above the risk-free rate for 11.33 points of volatility. Over a 12-month horizon, the 95% VaR is $12,940. That is 1.645 times 11.33%, or 18.64%, less the 5.70% expected return. The 99% VaR is $20,657. Both mean a loss larger than that figure has a 5% or 1% chance under the model, not that losses stop there.
Finance Quest is educational. It is not financial advice, and no calculator here knows your full situation.
A 95% VaR of $12,940 on a $100,000 portfolio says that, under the model, losses beat that amount in about 1 year in 20. It says nothing about how much worse the bad year gets. The 99% figure of $20,657 is a better look at the tail, and even that sits on a normal curve. Read VaR as the point where the bad outcomes start, and check it alongside volatility and the share of the portfolio in stocks.
It is the annual standard deviation of the portfolio's returns, in percent. A portfolio at 11.33% volatility has returned within about 11 points of its average in roughly two years out of three, under the normal-distribution assumption. It is lower than the weighted average of the holdings' volatilities when the holdings do not move in lockstep.
Many guides use 1.0 as a mark of good risk-adjusted return, and the lab's labels follow that. Sharpe ratios depend on the risk-free rate and the expected returns you enter, so a figure from sample inputs, like 0.11 here, compares the inputs, not the real market.
Beta is sensitivity to the overall market. A beta of 1.0 moves with the market, and 0.69 means the portfolio is expected to move about 0.69% for each 1% market move. It is the weighted average of each holding's beta, so bonds with a beta near 0.1 pull it down.
VaR names a loss that is exceeded with a stated probability, 5% for the 95% level and 1% for the 99% level. The loss in the remaining cases can be any size. That is why the lab calls it a threshold and warns that actual losses can be larger.
The portfolio analyzer works at the asset-class level (cash, bonds, stocks, real estate, alternatives) and scores diversification. This lab works holding by holding, with each holding's volatility, beta, and correlations, and it adds beta, alpha, and value at risk.
The lesson for this lab is in Chapter 13, Stock Market Basics. Read the lesson