Return Distribution is one of the six instrument analysis tools that assist in evaluating the investment worthiness of stocks, ETFs, Indices, or investment themes. It involves comparing symbols based on their consistency in returns.
Return distribution shows the pattern of a potential investment’s daily gains or losses. It describes the range of possible outcomes and their probabilities by plotting the frequency of daily change. Analysing Return distribution is important for assessing risk and making informed investment decisions. Common measures include mean, standard deviation, skewness, and kurtosis. The summary shown below the return distribution chart provides you with a simple to understand description on how to interpret the chart and gain insights.
For example, in the chart shown below investors can observe the return distribution of AMAZON, which displays negative skewness. AMAZON has significant positive skewness in it’s return distribution. This indicates that investors can expect AMAZON to recover from drawdowns quickly. Which makes AMZN a good candidate for investing on short-term bullish trends or even counter-trends hoping for a pull-back.
Additionally, AMAZON usually has shorter drawdown period than the S&P500 index. S&P500 index has more chance of extreme outcomes than AMAZON. Therefore, S&P500 must receive a lower allocation than AMAZON in your portfolio.
In summary, Return Distribution analysis helps investors assess consistency, drawdown periods, and probability of extreme outcomes, thereby enabling them to make informed allocation decisions within their portfolios.
Follow these easy steps to use Alpha Builder’s tool “Return distribution” to compare symbols by consistency:
1. On the home-page, click “Alpha Builder” or select sub-menu item “ALPHA BUILDER” under the “TOOLS” head of the “PRODUCTS” menu.
2. Scroll down the page and click on “Return distribution“.
3. The chart displays the return distribution of NIFTY-50 by default.
4. Click on the left-side text-box with text as “Symbol 1“, type the symbol and click on one of the presented options.
5. Now click on the hand lens icon next to the text-box.
6. The comparative return distribution of the selected symbol with NIFTY-50 will be displayed chartically.
7. Click on the right-side text-box with text as “Symbol 2“, type the symbol and click on one of the presented options.
8. Now click on the hand lens icon next to the text-box.
9. The comparative return distribution of the two selected symbols with NIFTY-50 will be displayed chartically.
Useful Links:
Sector or Theme Return Distribution US
How to Use Alpha Builder (YouTube)