As an example, the current Risk Index for Infosys (INFY) is:

Current Price - Low Price / High Price - Low Price =

46.62 - 23.86 / 111.90 - 23.86 =

22.76 / 88.04 =

25.8%

Here's what I do to get the Upside-Down Ratio which is:

High Price - Current Price / Current Price - Low Price =

111.90 - 46.62 / 46.62 - 23.86 =

65.28 / 22.76 =

2.9

The minimum U-D for a SSG Buy is 3.0. The Help section of Take Stock Online says "You don't want a risk index above 25 percent."

Ellis Traub, the developer of the Risk Index and Take Stock, gave a workshop here where he said that the Risk Index was an improvement, but did not explain what he meant; see:

http://www.stockcentral.com/community/forums/tabid/54/forumid/5/postid/2110/view/topic/tpage/2/Default.aspx

           [2/7 session, "Let's use It!!"]

Maybe he will respond and share more of his thinking

Armin Fields

" TSSW doesn't provide the UD ratio. And all of the educational material on my shelf doesn't say a thing about the risk ratio, either.  I searched online a found a discussion by Ellis Traub comparing Risk versus UD, but I don't have experience or any comparison guide to "translate" from UD to Risk ratio."

Hi Michael and Armin,

I found this explanation from Ellis describing in more detail the benefit of using the Risk Index as opposed to the U/D ratio on the Take Stock TSSW form back:

"The risk index is very similar to the Upside/Downside Ratio but with some benefits that make it more intuitive.

As you know, the U/D ratio is calculated by dividing the difference between the forecast high price and the current price by the difference between the current price and the forecast low price. We, of course, are looking for a 3:1 ratio.

The Risk Index is calculated by dividing the difference between the current price and the forecast low price by the difference between the forecast HIGH price and the forecast low price. We look for a value of .25 or 25% here.

A 25% risk index is the same as the 3:1 U/D ratio since 25% represents risk and therefore 75% must represent reward. In fact, you can convert one to the other quite readily as follows:

RI = 1 / (U/D + 1)

U/D = (1 / RI) -1

The advantage of the Risk Index is that, as the current price declines and approaches the forecast low price, it declines linearly whereas the U/D grows asymptotically as the current price approaches the low, becoming infinity when they are equal.

This is very unwieldy and produces an U/D ratio that is in a reasonable range only within a very small window. This is one of the reasons so many folks think it’s necessary to lower the low price estimate when the U/D goes into double digits.

To make this as simple as possible: we are examining the risk. To do so, we analyze the current price relative to the range between the high and low prices. We do this in both cases; i.e., the U/D ratio and the Risk Index. It’s certainly a more intuitive measure if you can say that 25% of the “deal” is risk. If the price should go down one percent of that distance, it would be 24% risk. If it went down another 1%, it would show a 23% risk. If it then went down another 10%, it would be 13% risk, and so on, until there is virtually no risk when they are the same.

(Realistically, we know of course that there is an element of risk in any investment; but this is not what this metric should tell us.)

For the same decline in percentage, if you started with a 3:1 U/D ratio and the price declined the same amount as in the previous paragraph, the U/D ratio would go to 3.16:1. However, another decline in the same amount would make the U/D ratio 3.35:1. And the next 10% would put the U/D at 6.7:1. The increase in the U/D is different even though the decline is a constant dollar amount or percentage of the high to low range. This is because every increase in the numerator of the equation causes a reduction in the denominator. By not holding the denominator constant, the changes become radical and unwieldy.

It seems simple just to think of the risk as a linear percent of the range—the risk is 10%--rather than to try to grasp the variations in the U/D ratio."

I'm not sure that we would want to provide the U/D ratio on the TSSW as we would then essentially need to also provide the entire "Zoning" section from the SSG, and explain (and offer) the 33/33/33 vs. 25/50/25 options therein.  We are happy to discuss the possibility further though if indeed you still feel strongly that both should be provided.

Dave

Hi Michael,

We don't call Take Stock Online an NAIC-compliant tool, nor is ICLUB Take Stock (the desktop version), as they both use the TSSW Form instead of the SSG.

> Did some one change the calculation method, and not update the manuals and online training?

The Take Stock help files available online here, and the ones available in our desktop ICLUB Take Stock program refer to and explain the Risk Index, tmk they make no reference to the Upside/Downside ratio.

Ellis Traub, the creator of the Take Stock book and software, held an online workshop here in our community forums that explains more of the history of the program, it can be found in Investing > The Classroom > All About Take Stock.

If you have additional questions, comments or suggestions please let us know.  Thanks!

Dave