What is Risk?

What is Risk?

What is Risk?

There are many terms used by investment professionals and academics in their quest to define risk. These include markets, benchmarks, asset classes, styles, style boxes, investment objectives, risk factors, market dimensions, market segments, categories, market averages, buckets of stocks, rules of ownership, slices of the market, industry classifications, and indexes such as Dow Jones Indexes, Standard and Poor's Indexes, Russell Indexes, Wilshire Indexes, Morgan Stanley Capital Indexes, Wired Index, and many more. Diversification and measures of volatility, such as standard deviation, are also used to describe risk. Every one of these is an attempt to identify common risk and return characteristics among groups of stocks included in that classification. To reduce confusion, market or index will often be substituted for these terms.

An appropriate challenge to the investment industry is a call to action to develop an SEC-approved standard to measure the risk of various investments. The three-factor model proposed by Eugene Fama and Kenneth French in 1992 would be an excellent starting point. This model is discussed further in Step 8: Riskese™.