Introducing the RiskRatings

Tuesday, Jun 18 2019 by
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Introducing the RiskRatings

We have just this morning released a suite of new features to the Stockopedia site - including the RiskRatings and the StockRank Styles.  I will be explaining these features in an extensive webinar at 1pm today (Thursday 4th May) - (Replay link is here).  The following piece is the copy from our RiskRatings Ebook which can be downloaded for iPad, Kindle, PDF or read online here.  I will be publishing another post about the StockRank styles in due course.


The RiskRatings are Stockopedia’s classification of the market volatility of every company’s share price. We have designed the RiskRatings to be both a useful predictive measure of future volatility, but also an easy to use measure for accessing the “low volatility anomaly” - the unusual fact in equities, that lower volatility securities tend to outperform high volatility securities over the long term.

The five classifications (from least to most volatile) are Conservative, Balanced, Adventurous, Speculative and Highly Speculative. At any time 10% of the market will be classified as Conservative, 15% Balanced, 20% Adventurous, 25% Speculative and 30% Highly Speculative.

In general, larger, more predictable and more profitable companies (such as Microsoft or Unilever) tend to be classified as Conservative, while younger, news driven, early revenue companies (such as Snap Inc or Sirius Minerals) will be classified as Speculative.

riskratings.png

Volatility is the most common measure of risk used in quantitative finance to assess risk adjusted returns. The use of volatility as “risk” is somewhat controversial, and criticised by many value investors. The common complaint is that "risk is not volatility, it is the likelihood of capital loss".

But modern portfolio theory, and most private investors, more broadly define Risk as the possibility of upside gain as well as downside loss. While value investors have struggled to quantify the likelihood of capital loss, Quantitative Investors have proven that price volatility is one of the best predictors of future upside and downside financial risk.

While the RiskRating is the essential rule of thumb for this purpose, we do recommend using the full suite of financial indicators available on Stockopedia to measure standard financial risks - including Bankruptcy Risk, Earnings Manipulation Risk and other Quality factors.

Risk and Return - theory vs practice

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Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>


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112 Comments on this Article show/hide all

Edward Croft 9th May '17 93 of 112
1

In reply to post #183019

Yes we'll be publishing a longer format guide on the StockRank Styles and I'll be doing a blog this week.

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herbie47 9th May '17 94 of 112

In reply to post #183085

OK good, many thanks.

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PhilH 9th May '17 95 of 112
1

HI Ed,

Another request from me.
I've been reviewing my portfolio in light of the webinar and noticed that of the 17 stocks I hold, in terms of risk style I have ...

2 Balanced
14 Adventurous
1 Speculative

I was quite surprised by this but on reflection my approach leads me to buy into stocks that are trending positively, ideally after a break out and I cut losers quite quickly.

In terms of StockRank Style, I have ...

13 High Flyers
4 SuperStocks

I'd be really interested to see performance graphs for the various combinations of Risk Styles & Stock Rank Styles. I recognise that might be quite a lot of graphs. To thin it down how about just the winning StockRankStyles for now?

I'm interested in them as I'm wondering if I'm missing out of some big gains during a risk on period by limiting exposure to more Speculative end of the risk profile.

Thanks in advance
Phil

P.S. I'm using a 'Regional' RankingSet for my universes

Professional Services: Sunflower Counselling
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Graham Ford 9th May '17 96 of 112
1

To what extent is the volatility/risk a function of spread/liquidity and years since IPO? In other words, if we screened the micro caps to exclude those with large spreads and only recently floated would we still find the large difference in numbers of micro caps classified highly speculative as compared to larger cap companies?

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Edward Croft 10th May '17 97 of 112

In reply to post #183112

I don't have that data available I'm afraid but it makes intuitive sense that yes high bid/ask spread companies will be more volatile. Market makers will need more insurance to take stock onto their books in highly volatile stocks so they'd naturally widen the spread.

We do apply a 'years since IPO' adjustment to the ratings. The best rating a recent IPO can receive is speculative and as it matures it can go further up the hierarchy over time.

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Damian Cannon 10th May '17 98 of 112
1

In reply to post #183237

Hi Ed,

I'm just wondering - is a 'years since IPO' value available as a screening filter? I haven't found this when looking but I'd quite like to cut out recent floats from my list of shares!

Alternatively I'd like to be able to input a list of tickers for those shares that I *don't* want to see in my screen results because I've already counted them out. Is this an option which I've overlooked?

Thanks,

Damian

Blog: Ambling Randomly
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Alex Naamani 10th May '17 99 of 112

In reply to post #183252

Hey Damian,

Thanks for this. We are in the process of making IPO and other dates available in the screener. Users will be able to exclude, or include companies that have had a recent IPO, stock split, dividend pay date, dividend ex-date and so on.

Are there any dates you are particularly interested in, beyond IPO dates?

Thanks,

Alex

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Damian Cannon 10th May '17 100 of 112

In reply to post #183528

Hi Alex,

That's good news thanks. I think that dividend dates (ex, pay) would be very useful along with the IPO date. Stock splits not so much but I could see a use for financial dates like those for AGMs, half-year and full-year results along with trading statement dates where known.

On my other question it would definitely be useful to be able to exclude specific stock tickers as I have some core screens which pick up companies that I don't want but I can't use another filter to exclude them because this would be too general. So the ability to add a list of tickers to filter out individually would be very handy.

Cheers,

Damian

Blog: Ambling Randomly
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Alex Naamani 10th May '17 101 of 112
1

Hey Damian,

Thanks for your reply - we can in theory provide a screening 'blacklist', as it were. Lot's of people have put this idea forward here - http://bit.ly/2q3yDtN . I'd be most grateful if you could add further comments and maybe a vote, because we tend to act on the most popular ideas.

We'll keep everyone updated as we make progress on this front.

Thanks,

Alex

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samanddee 10th May '17 102 of 112

Ed -

Could risk ratings you've just created please be added to the Your Holdings section where you can screen per holding. This would allow a quick review of risk ranking for all held holdings rather than having to go into each stock selection which takes a lot of time.

thanks

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herbie47 10th May '17 103 of 112
1

In reply to post #183584

Yes you can add a column as long as you have room, max 15, just go to holdings, click on edit (pen), then profile then go down to Risk Rating and click add then save changes.

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Damian Cannon 11th May '17 104 of 112

In reply to post #183536

Great suggestion thanks Alex - I've added my comments on blacklisting stocks from screeners here: http://ideas.stockopedia.com/forums/18977-stockopedia-suggestions/suggestions/5717337-allow-the-exclusion-of-specific-companies-from-scr

Just need a few more people to up-vote the idea now...

Blog: Ambling Randomly
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davidtalbo 12th May '17 105 of 112
1

I consider the StockRank Style term "Neutral" is misleading and should be replaced by a term such as "Unclassified". The term "Neutral" suggests some mid-range whilst, in practice, stocks being classed as neutral have a wide range from those with relatively high mixtures of Q, V and M ratings, but which do not happen to fall within the four "positive" available StockRank styles, to those with relatively low mixtures of Q. V and M ratings, but which do not happen to fall within the four "negative" available StockRank styles.

To give one example, a stock with high Q and M ratings, and a relatively high V rating (but not one high enough for the stock to be classed as a SuperStock) would be (perversely?) classed as "Neutral", whilst if it had a lower V rating (and hence it could be argued possibly a lower potential return) it would be classed as a "High Flyer".

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Edward Croft 12th May '17 106 of 112
1

In reply to post #184412

Indeed this is true. We originally called it "Unclassified", but then opted for "Style Neutral" as it was more noun than adjective. I really don't think the English language has the right word for this class of shares. I've pored through the Thesaurus trying to figure out a better option. Ideas welcome.

It's true that high ranking shares can be in the Neutral zone. I've seen 95 StockRank shares in this segment. While some High Flyers are currently ranked as low as a StockRank of 32. I think this is what's great about the Styles. We've seen that some of the High Flyer RiskRatings have performed extraordinarily well (e.g. Speculative High Flyers) but the median StockRank of that group is about 65. The Styles provide much more richness to the ranking system as a whole. I'm also sure that we'd find the high ranking 'neutral' stocks have done much better than the low ranking neutral stocks.

So there's nothing inherently bad about many Neutral classed shares - there's 33.33% of the market in this zone... it's just that they don't fit neatly into one of our archetypal buckets. So they are Style Neutral.

Regarding transitions - We have actually allowed a zone where shares can travel directly from Style to Style, without travelling through the Neutral space, but they have to be at an extreme. So Super Stocks can become High Flyers directly, but only if very strong QM shares. Lower QM Super stocks can only travel via the Neutral zone to become High Flyers.

You can tell I'm talking about space... it's a 3D QVM Cube. I'm a bottle of red to the good... so excuse me if I'm rather florid and even non-understandable.

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crazycoops 14th May '17 107 of 112
3

Ed

I think the difficulty with having a classification system that has such a large population of shares as neutral/unclassified is that it appears unhelpful (at least visually). I wonder if a simple solution might be to colour code the neutral category; green for those that are closest to the winning strategies, red for those closest to the losing strategies and a much smaller population of shares in the middle remainsing grey?

Just a thought!

Personally, I think that would make the system easier to identify targets for further research (depending on style) and/or track shifts in classification over time.

Cheers, Simon


Blog: Share Knowledge
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davidtalbo 14th May '17 108 of 112

In reply to post #184460

Hello Ed

Thank you for the detailed response to my comment, which was much appreciated. The response was totally understandable, despite the bottle of red.

I rate the Stockopedia rating systems highly, and am an experienced user, but, nonetheless, I had to keep reminding myself that a Neutral rating did not necessarily mean an indifferent rating. I think other, less experienced users, could have difficulties in interpretation..

One of the beauties of Stockopedia is the ease with which one can quickly reduce the universe of stocks for possible investment to a manageable selection, and the wide ranging Neutral classification does not help this process.

I was going to suggest you possibly split the Neutral/Unclassified share set into something like Good, Mediocre and Poor, but crazycoops alternative suggestion (post 107) to colour code this share set also appears a good one.

Anyhow, I know you are looking at StockRank Styles again and I hope this discussion has added something positive to your deliberations.

Best wishes

David Talbot

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Edward Croft 14th May '17 109 of 112
1

In reply to post #184592

I was going to suggest you possibly split the Neutral/Unclassified share set into something like Good, Mediocre and Poor, but crazycoops alternative suggestion (post 107) to colour code this share set also appears a good one.

Really, the StockRank does this already so I'm not sure this suggestion would add any new information.  The center of the Neutral set will be a StockRank of 50 (approximately), so one glance at the StockRank and you know whether it's a higher or lower ranking unclassified stock. Adding colour coding of the Style would just duplicate the information already displayed - and quite possibly we'd then receive requests for higher ranking High Flyers to be colour coded more strongly than lower ranking High Flyers !   

I think other, less experienced users, could have difficulties in interpretation.

The Styles are designed to show if stocks have a strong match to one of the archetypes.  That's all. Yes we've split them into 'winning' and 'losing' styles with colour coding and description... but it doesn't mean that if a stock isn't in a winning style that it can't be a winner.

I think learning the nuances of the ratings gives more dedicated subscribers more of an edge !


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DanielRudd 6th Dec '17 110 of 112

Any chance we could get an updated RiskRating performance graph for the fans?

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iwright7 7th Dec '17 111 of 112

I read recently that the combination of Value and High Volitility (Highly Speculative) work coming out of a recession;   (The little book of stock market profits - Mitch Zacks). 

Does anyone know of firm evidence for this?    Thanks Ian


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Christer Brannstrom 3rd May '18 112 of 112

Sorry for being late on the ball, but I have to ask.. ..are the slides available somewhere. There's some really good tables and things in this presentation that's not available in the eBook and I'm to lazy to manually copy them into Excel. Will of course do that if the slides aren't available.

Thanks for a fantastic webinar!

Company: Contracting Coder Ltd
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