Get Sharpe and Drawdown Some Volatility All Investments Carry Some Level of Risk, but Is There a Way to Calculate the Odds of Danger Exactly? Unfortunately Not, Explains Iain Morse
Morse, Iain, The Independent (London, England)
THESE DAYS, if you consult a financial adviser, they will ask about your attitude to investment risk - low, medium, or high - before making any recommendations.
But risk is difficult to measure. Angela Knight, chief executive of the Association of Private Client Investment Managers and Stockbrokers (APCIMS), says : "A lot of research has been carried out on this subject. It shows a wide gap between how the man or woman in the street sees risk, and risk measures used by investment managers. There's a real problem about translating technical concepts into terms the consumer can understand.
"For most of us it probably means the chance of losing our original investment, or it's not keeping pace with inflation, or its value is fluctuating, or it not ultimately being worth enough to meet our goals. "There's also a danger that investors will think index or tracker funds are risk free, by comparison to actively managed funds. In either case the absolute risk, that of losing all the money you first invested, is pretty small if you hold the investments long enough." Now check on the past performance of unit or investment trusts, a PEP, or personal pension. You'll find it grouped in a class of like funds against which its past performance can be measured. League tables in ads paid for by fund groups will only tell you how well they have done over the past few years - they don't tell they full story. Specialist publications will also include a measure of "fund volatility". This is a one way of gauging risk. "Volatility" measures the upward and downward movements in the price of a fund in relation to it's average return. A fund which has above average volatility against its sector offers greater potential for gains and losses than funds with lower volatility. If you pick up a specialist magazine, such as MoneyFacts, Life & Pensions or Money Management, you will notice that volatility is usually measured over 36 months. This is because it uses "standard deviation", which requires at least 36 observations to be meaningful. Over the 36 months to mid-September, for example, the volatility rating of unit trusts in the UK Growth & Income sectors was 3.47. Over that same period, Global Emerging Markets' sector rating was 7.91, the FTSE 100 index had a rating of 3.64, while the broader FTSE All Share was rated at 3.44. UK Growth & Income has 119 funds and their sector value grew by 43.44 per cent over the 36 months in question. The best performing fund is this sector, CF Utilities, returned pounds 1,766. …