Author Topic: investment risk  (Read 3917 times)

lano

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investment risk
« on: June 01, 2014, 09:49:20 PM »
Given that an asset is anything that will generate cashflows in the future.

What is the risk of an asset?

A. The volatility of the price of the security.  A stock or any other asset, the prices of which moves up and down a lot and by a large magnitude, is considered a high risk stock.  Likewise, a stock or any other assets, the price of which does not move up and down rapidly and by a large magnitude is a low risk stock or asset.  In short risk equals volatility.

B.  Risk is not price volatility, but rather the risk of an asset is similar or even identical to the risk of a single business.   Given the definition of an asset above, risk then is the certainty that the asset will be worth more in the future.  This in turn is based on the assets ability to generate cashflows during the time that you own it.

C.  Something else.

A, B, or something else?


deborah

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matchewed

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Re: investment risk
« Reply #2 on: June 02, 2014, 07:31:33 AM »
Given that an asset is anything that will generate cashflows in the future.

What is the risk of an asset?

A. The volatility of the price of the security.  A stock or any other asset, the prices of which moves up and down a lot and by a large magnitude, is considered a high risk stock.  Likewise, a stock or any other assets, the price of which does not move up and down rapidly and by a large magnitude is a low risk stock or asset.  In short risk equals volatility.

B.  Risk is not price volatility, but rather the risk of an asset is similar or even identical to the risk of a single business.   Given the definition of an asset above, risk then is the certainty that the asset will be worth more in the future.  This in turn is based on the assets ability to generate cashflows during the time that you own it.

C.  Something else.

A, B, or something else?

Much like deborah pointed out risk is many things. It is A, B, and several different C's.

hodedofome

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Re: investment risk
« Reply #3 on: June 02, 2014, 09:31:49 AM »
I won't speak to all of it but I for sure don't consider volatility and risk to be the same thing. Similar, but not the same.

Volatility is how much something oscillates around it's mean for a certain timeframe. Something could have high upside volatility but low downside volatility and is therefore less 'risky' than the sharpe ratio would imply. Or, an asset could have low volatility (say a bond) but could be risky to hold in an inflationary or rising interest rate environment. Low volatility does not always mean less risk and vice versa.

Risk (to me at least) is losing all your money, losing so much money that you'll never recover in a reasonable amount of time, or just underperforming your objectives.

Franklin

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Re: investment risk
« Reply #4 on: June 02, 2014, 11:24:03 AM »
Quote
Risk (to me at least) is losing all your money, losing so much money that you'll never recover in a reasonable amount of time, or just underperforming your objectives.

I consider losing all of my money (initial investment) to be the minimal effect of risk.  My bigger fear is losing more than my initial investment, like through leverage or liability.  That is why I have stayed away from real estate rentals.  I don't consider it worth the risk.

arebelspy

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Re: investment risk
« Reply #5 on: June 06, 2014, 11:26:45 PM »
Quote
Risk (to me at least) is losing all your money, losing so much money that you'll never recover in a reasonable amount of time, or just underperforming your objectives.

I consider losing all of my money (initial investment) to be the minimal effect of risk.  My bigger fear is losing more than my initial investment, like through leverage or liability.  That is why I have stayed away from real estate rentals.  I don't consider it worth the risk.

Seems to me you should consider the probability of that happening.

Extreme example: What if you could get an investment that returned 10,000% per year for 5 years, but had a 0.001% chance of you being wiped out completely?  Would you invest?

Hopefully the answer is an obvious yes.  Now you consider something like rental real estate, look at the returns of that versus chance of being wiped out.  Obviously the former is much lower than in our example, and the latter probably higher.  But you have to weigh the return versus that risk (the risk of being wiped out entirely) as well as ways to mitigate that risk (insurance, for example).

Dismissing all opportunities completely that offer risk beyond losing an initial investment is short sighted, IMO.
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butchmonkey

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Re: investment risk
« Reply #6 on: June 06, 2014, 11:38:24 PM »
It turns out standard deviation is a good proxy for most types of investment risk, including total loss, and underperformance. Evaluating the standard deviation of an asset is an excellent first step in estimating its actual risk.

Of course it is only a proxy and there are exceptions to this observation.


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warfreak2

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Re: investment risk
« Reply #7 on: June 07, 2014, 04:17:09 AM »
Extreme example: What if you could get an investment that returned 10,000% per year for 5 years, but had a 0.001% chance of you being wiped out completely?  Would you invest?
I wouldn't invest, it's obviously too good to be true. You should be skeptical that an initial investment $1670 could pay off the US national debt, with only a 0.001% chance of default. ;-)

Quote
Risk (to me at least) is losing all your money, losing so much money that you'll never recover in a reasonable amount of time, or just underperforming your objectives.

I consider losing all of my money (initial investment) to be the minimal effect of risk.  My bigger fear is losing more than my initial investment, like through leverage or liability.  That is why I have stayed away from real estate rentals.  I don't consider it worth the risk.
Leverage is an optional way to increase both return and risk for any asset class. You could invest in real estate without leverage, or the stock market with leverage, if you wanted. Leverage is traditionally more associated with real estate, though, because you can't get a margin call on a mortgage - one of the main risks of leverage is that the lender will want their money back when your investment will tanks, so you're forced to sell low. But however far house prices fall, you won't be forced to sell to pay off a mortgage.

clifp

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Re: investment risk
« Reply #8 on: June 07, 2014, 04:45:04 AM »
I won't speak to all of it but I for sure don't consider volatility and risk to be the same thing. Similar, but not the same.

Volatility is how much something oscillates around it's mean for a certain timeframe. Something could have high upside volatility but low downside volatility and is therefore less 'risky' than the sharpe ratio would imply. Or, an asset could have low volatility (say a bond) but could be risky to hold in an inflationary or rising interest rate environment. Low volatility does not always mean less risk and vice versa.

Risk (to me at least) is losing all your money, losing so much money that you'll never recover in a reasonable amount of time, or just underperforming your objectives.

I agree

I think volatility is lazy way of describing risk, primarily used by those don't understand the intrinsic value of the asset.   For instance the VIX index of the S&P 500 five years ago was about ~30 vs ~10 today.   So while it is entirely possible that risk of losing money over a 30 day period was much higher in June 2009 than in June 2014.  I think the risk that you'd lose money over a 5 year period with S&P at 950 is much lower back in 2009, than it is with S&P @ 1950.

I like your definitions of risk and add one more risk to me is the probability that it will impair my retirement.