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V2 Ratio

The V2 ratio is a volatility-based financial metric used to measure the performance of a fund or portfolio relative to its risk exposure. It compares the portfolio’s returns to the volatility of those returns, offering insight into how well the portfolio performs given the level of risk involved. A higher V2 ratio indicates better risk-adjusted performance, suggesting that the portfolio generates more returns per unit of volatility.

Example

A fund with a V2 ratio of 1.5 has a higher risk-adjusted return than one with a ratio of 1.0, meaning it generates more return for each unit of volatility.

Key points

• Measures portfolio performance relative to its volatility.

• A higher V2 ratio indicates better risk-adjusted performance.

• Useful for assessing how well a portfolio manages risk while generating returns.

Quick Answers to Curious Questions

It provides a way to assess how efficiently a portfolio generates returns relative to its volatility, helping investors gauge risk-adjusted performance.

While standard deviation measures total risk, the V2 ratio focuses on the relationship between returns and volatility, offering more insight into risk-adjusted performance.

A low V2 ratio suggests that the portfolio is not generating sufficient returns for the amount of volatility or risk it is exposed to.