In this article, you will learn how Andes convert Nitrogen’s risk score using volatility.


First, let’s start with how the risk score works. We have previously written an article explaining how risk score is calculated. We develop a hypothesis that the risk score can be achieved by multiplying volatility by 5. In our article, we illustrated that the average volatility of SPY is close to 20 which is a 100% equity ETF. We can reasonably say that SPY’s risk score is 100. To test our hypothesis, we created a model/portfolio consisting of SPY and BND (Vanguard Total Bond Index). Then based on that model, we created a table of several models with different asset allocations. Based on the volatility of those allocations, validates our hypothesis that the risk score is volatility multiplied by 5. 


You can refer to the table below:


Table 1: Average volatility of common asset allocations with SPY and BND.


Asset Allocation

20/80

30/70

40/60

50/50

60/40

70/30

80/20

90/10

100/0

Volatility

5.0

6.4

8.0

9.7

11.5

13.4

15.4

17.2

19.2

Volatility * 5

25

32

40

48.5

57.5

67

77

86

96


Given that the risk score is based on volatility, we can now convert it to Andes’ patented Risk Tolerance. 


Converting Nitrogen Risk Number to Andes Risk Platform


To convert the Nitrogen Risk Number to the Andes Platform we needed to divide the Risk Score by 5 and the result will be the volatility of that model portfolio.


Example:


Let’s use the below table as a reference for the conversion of your client’s risk score:


Table 2: Andes System Classic Model


Model Name

Target Return

Target Volatility

Classic Conservative 20/80

4.00

4.60

Classic 40/60

5.30

8.00

Classic Balance 50/50

5.85

10.00

Classic Balance 60/40

6.30

11.90

Classic Growth 70/30

6.80

14.00

Classic Aggressive 85/15

7.50

17.00

Classic Aggressive Plus 100/0

8.00

20.20


If you have a client with a risk score of 25, dividing it by 5 will get you a volatility of 5. In the above table, the client is willing to invest in the Classic Conservative 20/80 model since it has the nearest volatility. This means that, in our Risk Tolerance Test he is most comfortable in choosing the below model: 


Table 3: Andes Risk Tolerance Test



Another example is if your client has a risk score of 85, the volatility would be 17 (85 / 5 = 17). If we convert this to our Risk Tolerance Test, the equivalent model your client will likely choose would be the Classic Aggressive 85/15 model (see Table 2 for reference).


Summary


In summary, it is easy to convert Nitrogen risk numbers to the Andes Risk platform. If you send us a list, we will take care of the rest.