“The possibility of loss or injury” – That’s the dictionary definition of the noun “risk.”
Investors Think about Risk Differently from the Finance Industry
Individual investors and finance professionals tend to think about the riskiness of assets very differently, and these differences can have real negative consequences for portfolios. Nelli Oster explains.
However, while individual investors and finance professionals may agree on that basic definition of the word risk, they often think about asset riskiness very differently, and these differences can have real consequences for portfolios.
They measure risk differently. To measure risk, the finance industry focuses on an asset’s return volatility and correlation with other assets. Huh? Let me break down those somewhat complicated terms. Return volatility simply means how dispersed an asset’s returns are about that asset’s average return over a certain period of time, including to the upside and to the downside. An asset whose returns are more stable is considered less risky, while an asset whose returns are more volatile is considered more risky.