Daily Archives: June 12, 2015

Investment risk: some figures to watch in the assets

Risk chapter in a T-Report in T-Advisor

When you are an investor, you accept some risk. We have already written about the different kind of risks in investments. The question is: can we measure the risk? Well, risk is a qualitative ratio, but we can obtain some clues through quantitative measures.

Volatility is one of these measures. Does it mean that high volatility is the same as high risk? It depends on the asset. First of all, volatility does not measure the risk, but the price variation in a certain period. If there is a high diversion from the average price, it is very volatile. Of course, it is risky, as far as the prices change sharply and the investor can win or lose suddenly. However, think about another asset, as housing. Prices are no so volatile, but it is risky, because you have another risks: counterparty risk, inflation risk…

The liquidity grade is also important to measure the risk, as an investor can perceive how often the asset is purchased or sold. A low liquidity shows that the asset has a high risk that you cannot find a buyer when you want to sell it.

One of the most important measures for risk is Value at Risk, broadly know by its initials VaR. This index shows how much an investor can lose at the most with a probability of 95% in a certain period. The higher is the figures, the more risky is to lose money.

Correlation offers also a clue about the risk. This figure has a range between -1 and 1. In this case, the asset is compared with another asset, with its sector or with the reference stock index. If the correlation is 0 or near to 0, there is no correlation. If is 1 or near 1, there is a high correlation: the asset moves following the trend of the reference. On the other side, if is -1 or near -1, there is an inverse correlation: the asset moves in the opposite trend of the reference. This is very useful for negative waves, for instance.

As you can see, risk has no concrete measure. You have to look into figures to discover if the asset is risky and if the risk level of the asset is acceptable for your profile. The T-Report in T-Advisor gives full details about all the data about risks that an investor need to know to take decisions.