How to correctly annualize a risk measure? A common method to annualize monthly risk measures is to multiply the outcome by 12 or the square root of 12. Paul D. Kaplan has shown that for one particular measure, the standard deviation, this approach is incorrect, given that returns are compounded over time rather than summed. He has also presented a method to calculate the annual standard deviation correctly.
This article – by Ortec Finance’s Arno Weber, CIPM, published in the Journal of Performance Measurement, extends on Kaplan’s work. The article shows for a wide palette of risk measures and related statistics how the annual variants can be calculated correctly, under the assumption of compounded returns.
Contact Arno Weber about this article by sending an email.
If you are interested to learn more about our performance measurement and attribution solution, click here.