This is Andes' proprietary Risk Tolerance Test that maps directly to one of your model portfolio. This means that the analytics driving the upside (green) and downside (red) bar charts show the range of high and low values that are likely to occur 80% of the time.
Andes believes that displaying the absolute highs and lows would provide an exaggerated view of potential outcomes. Instead, by using an 80% confidence interval, we offer a more realistic representation of the potential performance, avoiding the extremes that are less likely to occur.
We assume that returns follow the normal distribution, which is defined by the mean (target return) and standard deviation (target volatility). We use 80% confidence interval, which is 1.28 standard deviation:
Upside = Target_return + 1.28 * target_volatility
Downside = Target_return - 1.28 * target_volatility
Note this formula applies when the time period is set to 1-Year. If it is set to 6-Month, the values will be adjusted accordingly.
If you look at the 1-Year return graph below, the Classic U.S. Growth 70/30's allocation is between +20% and -10%. These ranges help you set realistic expectations for portfolio performance and make informed decisions based on your risk tolerance.
Showing worst-case scenarios in Andes
If you need to share the worst-case scenarios with your clients, we have two available graphs in Andes: the Stress Test and Drawdown graphs. To access them, please follow these steps:
1. Go to Model Management in Andes.
2. Open your model.
3. Click on the "Stress Test" tab below.
If you have any questions or concerns, you can submit a support ticket or email us at: support@andesrisk.io