Blog 4 - Shaping a Portfolio's Performance Character

Risk vs. Volatility: Understanding the Difference

In professional jargon, "risk" and "volatility" are not equivalents. Real risk is a material hazard to business competitiveness—fraud, mismanagement, obsolescence, political interference. On the other hand, volatility reflects price fluctuations driven by fundamentals and market emotions (greed and fear). As such, volatility only becomes a "risk" when your time horizon is short—as in day-trading short, or when an investor panic sells.

Reading a Stock's Character

Stock prices are expected to fluctuate. But owning high growth stocks without understanding their volatile characteristics can be frustrating and often leads to unnecesary mistakes. Volatility comes from a combination of many elements. Learning to read a stock's character will help to find investments that deliver high returns at reasonable volatility levels. Here are four essential volatility measures:

i. Standard Deviation (Absolute Volatility)

Since 1980, the S&P 500 has averaged ~18% annual volatility¹. Most growth stocks experience much higher swings. With the market fluctuating nearly 15-25% annually, expect significant ranges within your portfolio.

With 25-35% being a typical range of variance for most growth stocks, in the OGF, we prefer individual stocks with standard deviation limits at < 35%. Though, we do allow for exceptions on higher-conviction positions, but these are managed more vigilantly using trailing stop-loss orders.

Key insight: The total variance for a well-diversified portfolio will be less than the sum of the individual variances. So, there could be room for some individual stocks with higher than average ranges of volatility. And when you know which stocks are more volatile, respect the need for greater variance for these high performers by setting wider stop loss trade orders.

ii. Sharpe Ratio (Return per Unit of Volatility)

The Sharpe Ratio measures average annual returns (in excess of the risk-free T-bill rate) relative to the amount of volatility over 5 years. This ratio helps to compare the performance characteristics for growth stocks from different industries.

Figure 2 (Source: OGF Data)

Example (Figure 2): 5 years ending June 2025:

• NVDA: 87% annual returns yet, even with high volatility (average annual Std Dev of 50%— it's Sharpe Ratio (1.65) is far superior to the S&P 500 (0.56). A Sharpe Ratio in excess of 1 means that the rewards being generated are very much worth the volatility, even if that volatility is excessive.

• Apple & Costco: Strong growth with moderate variance and moderate Betas—ideal for sensitive investors

• Berkshire Hathaway: Nearly identical returns and Sharpe Ratio to the SPY ETF.

For volatility-conscious investors, when choosing between stocks, the better Sharpe Ratio may not always be your highest gainer—but it should deliver good enough results and better sleep.

iii. Beta (Relative Market Volatility)

Beta measures a stock’s responsiveness to market movements:

A Beta = 1.0 moves in lockstep with the market.

A Beta > 1.0 amplifies moves.

A Beta < 1.0 dampens them.

Example (Figure 2): In Figure 2, Apple's 5-year Beta of 1.08 suggests that it should outperform the market by 8% in rising markets but underperform by 8% in declining markets.

"Beta reveals just how vulnerable, or defensive, your portfolio is at a given moment."

Portfolio application: Beta can be adjusted simply by reweighting your stocks. Increase your Beta exposure during expansions (i.e., invest more heavility into your existing higher Beta stocks); decrease your Beta exposure during contractions. Similar to sector rotation, this allows an investor to remain fully invested through all cycles.

The Sharpe/Beta Ratio: Profiling by Combined Risk Characteristics

"A volatility-conscious investor seeking better buck-for-their-bang should consider assessing a stock's character using the combined Sharpe/Beta ratio."

Divide the Sharpe Ratio of a stock by it's Beta. This enables an investor to discover which stocks have a performance character superior to the S&P 500.

Example (Figure 2):, Apple's Sharpe/Beta ratio of 0.78 beats the S&P 500's 0.56. Meanwhile, Costco's 1.08 is even better—double the growth compared to the S&P 500, yet the same Beta. That makes for a truly defensive growth stock.

iv. Correlation Coefficients (Diversification Check)

Diversification remains the only free lunch in investing.

Correlation Coefficients measure how strongly two stocks move together:

• +1.0 = move identically (poor diversification)

• 0.0 = uncorrelated

• -1.0 = move oppositely (excellent diversification)

By confirming correlations for all of the securities in your portfolio via the Portfolio Visualizer app (see Resources below), you can quickly identify the stocks where you might be vulnerable during the next downturn. Realistically, a well-diversified portfolio of growth stocks should have correlations below +0.60.

Figure 3

Example (Figure 3): Mastercard/Visa correlation of 0.93 offers poor diversification. Apple and Microsoft are suprisingly a beneficial pairing. Overall, Gold is the ultimate divesification tool.

Summary

By combining these four measures — Standard Deviation, Sharpe Ratio, Beta, and Correlation Coefficients — investors can optimize for long-term performance while moderating volatility.

When building your portfolio:

1. Focus on North American mid-to-mega cap stocks outperforming the S&P 500 over 5+ years.

2. Filter out high-volatility names beyond your comfort range.

3. Use the Sharpe/Beta ratio to find efficient growers.

4. Verify CCs annually to preserve diversification integrity.

The result? A more stable compounding portfolio — and better sleep quality.

Caveat: If you are risk senstive, select growth assets according to lower limits and ranges. Defensive growth stocks do exist. Avoid the temptation of stocks that exceed your risk tolerance limit. Psycho-graphic tests are available to help confirm your degree of sensitivity to volatility.

Resources:

• Asset Analyzer (Analyze Correlation Coefficients and Sharpe Ratios)

• The Investing Oasis - Chapter 9 "Brains and the Brawn"

 About:

Jay T. Mason, CFA, CFP manages the Oasis Growth Fund and is the author of

“The INVESTING OASIS: Contrarian Treasures in the Capital Markets Desert”,

as well as the: ‘More Buck for Your Bang’ Blog Series.

________________________

The Oasis Growth Fund is Series O of the Fieldhouse Pro Funds Inc trust series available by Offering Memorandum in Canada through select Financial Advisors. This education series is not intended as a solicitation for investment in the Oasis Growth Fund nor is it sponsored by Fieldhouse Capital Management Inc.

[1] New York State University