Developing an Appreciation for Risk
8 Pages Posted: 17 May 2013
Date Written: September 1, 2010
Investment risk is a multi-faceted concept. Various aspects of an investment’s risk can be important to some investors, but unimportant to others. The relevance of various risk metrics on a particular investment can shift over time. To reflect this complexity, there are many approaches to evaluating risk, and more statistical metrics can be devised than there are letters in the Greek alphabet. The practical reality is that understanding investment risk is a journey and not a destination. The key is to be attuned to risk, which comes from experience, from understanding and using with discernment the basic statistics available to describe investment opportunities, as well as from ongoing due diligence one’s investments. In this paper, we present a few examples of how to use the most elementary historical performance statistics, namely average returns and volatility of returns, to evaluate an investment.
Keywords: investment risk, volatility, investment performance statistics
JEL Classification: G11
Suggested Citation: Suggested Citation