The Long Term Returns Graph shows the average long term return and standard deviation for a given asset allocation to various factors. Below the graph you can enter your holding period in years for more specific information.
Calculations:
Average Return:
The average of the actual annual returns for every starting month over the selected holding period. For every starting month, returns are calculated based on the actual monthly returns that follow; the results are then averaged.
Standard Deviation:
Standard Deviation is a measure of how far apart returns are from the average. Portfolio returns approximate a normal distribution, which means that 68% of the time returns should fall within 1 Standard Deviation of the Average Return. Skewness and Kurtosis show us ways in which the portfolio’s returns are different from a normal distribution.
Sharpe Ratio:
The Sharpe Ratio is a measure of the risk-adjusted performance of the portfolio. It is calculated as the average annual return in excess of the risk-free rate divided by the standard deviation of the return in excess of the risk-free rate. The risk-free rate is the return on treasury bills in whichever currency is selected. If the return on treasury bills is unavailable, the intermediate term treasury bond return is used.
Skewness:
Skewness measures how different the distribution of returns are from a normal distribution. A normal distribution (bell curve) exhibits zero skewness. If a distribution is negatively skewed the left tail of the distribution is longer. A simple way to think about this is to think about the difference between the average and the median. When the average is lower than the median, this is likely due to outliers in the left tail of the distribution.
Kurtosis:
This calculation is technically excess Kurtosis, which measures how heavily the tails of a distribution differ from the tails of a normal distribution. A normal distribution exhibits no excess Kurtosis, meaning that the tails are accurately predicted by a normal distribution. Higher excess kurtosis is associated with more risk because it indicates higher probabilities of returns in the extreme left or right hand tails of the distribution.
Percentiles:
Also shown are the best/worst, median, and top/bottom 20% actual returns over the specified holding period. These are calculated from actual returns for every starting month over the specific holding period.