Learn the stock market › Risk › Lesson 2 of 5

Two ways to measure risk

Short answerThe most common measure is how much the price swings, the volatility: how big an ordinary day's move is. The other is the largest fall from a high, the one you feel in your account. They do not say the same thing. Among the 20 largest US companies, Berkshire Hathaway swung the least over the last five years, 1.09% on an ordinary day, yet still fell as much as 27%. The Sharpe ratio weighs the return against the swings.

Swings and falls

The first measure, volatility, tells you how far the price usually moves, up or down, from one day to the next. It is the standard deviation of the daily moves, and the larger the number, the more the stock swings. The second is the largest fall from an earlier high to a later low. It says how badly things went, at worst, for someone who bought on the wrong day.

Here are both for the 20 companies since Nov 6, 2021, in alphabetical order:

Company	Daily move	Largest fall	Sharpe ratio
AMD	3.69%	−65%	0.67
Alphabet	2.05%	−44%	0.57
Amazon	2.31%	−56%	0.40
Apple	1.77%	−33%	0.74
Berkshire Hathaway	1.09%	−27%	0.88
Broadcom	2.83%	−41%	1.00
Costco	1.45%	−31%	0.81
Eli Lilly	2.07%	−34%	1.20
Exxon Mobil	1.68%	−21%	0.96
JPMorgan Chase	1.54%	−38%	0.78
Mastercard	1.50%	−28%	0.67
Meta	2.86%	−74%	0.49
Microsoft	1.79%	−37%	0.49
Netflix	2.76%	−76%	0.22
Nvidia	3.26%	−66%	0.96
Oracle	2.84%	−65%	0.34
Palantir	4.23%	−78%	0.86
Tesla	3.76%	−73%	0.27
Visa	1.43%	−24%	0.72
Walmart	1.43%	−26%	0.99

From Nov 6, 2021, with dividends reinvested. The Sharpe ratio is worked out without taking off the interest rate.

Berkshire Hathaway swung the least, 1.09% a day, and Palantir the most, 4.23%. But the two measures do not always agree. Alphabet was in the calmer half, at 2.05% a day, and still fell 44%. Eli Lilly was in the wilder half, at 2.07% a day, and fell at most 34%. The swings say how bumpy the ride is, the fall how deep it went.

The Sharpe ratio

The Sharpe ratio, which William Sharpe described in 1966, divides the return by the swings. A higher number means more return for each percent of volatility, over the period that was measured. Strictly, the return on a risk-free investment is taken off the return first; here it is left in, so the number comes out a little higher than with the interest rate.

This is how it works out for Berkshire Hathaway. The average daily move, times 252 trading days, comes to 15.2% a year. The yearly volatility is the daily one times the square root of 252, which is 17.3%. 15.2% divided by 17.3% is 0.88.

The Sharpe ratio counts only the swings, not how deep the falls went, and it is built on a period that is already over. The same company can get a very different ratio over the next five years. That is why it pays to look at both measures.

Source

William F. Sharpe, The Sharpe Ratio, The Journal of Portfolio Management, Fall 1994, read on 6 November 2026.

Test yourself

Company A moves 1.3% on an ordinary day and company B 2.5%. What do you know about their largest falls?