The Mismeasurement of Risk
Windham Capital Management
Don R. Rich
affiliation not provided to SSRN
Financial Analysts Journal, Vol. 58, No. 3, May/June 2002
Investors typically measure risk as the probability of a given loss or the amount that can be lost with a given probability at the end of their investment horizons. This view of risk considers only the final result, but investors perceive (or should perceive) risk differently. They are affected by exposure to loss throughout the investment period, not just at its conclusion. We introduce two new ways of measuring risk - within-horizon probability of loss and continuous value at risk - which reveal that exposure to loss is substantially greater than investors normally assume.
Date posted: October 19, 2002