Talk:Risk and return: an introduction

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Revision as of 12:58, 29 July 2019 by Longinvest (talk | contribs) (Criticism of the current wiki page on Risk.)
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Plans for Sections

Currently working on improving the Intro and the first section. Will replace current chart with charts showing frequency distribution of returns for Bills, Bonds and Stocks, and will add text to further explain the relationship between risk, dispersion of returns, and expected returns.

Here is a list of sections I'm planning on adding. This is tentative; feel free to contribute ideas on sections to add:

  • Measuring Risk (variance, standard deviation, other)
  • Systemic and Unsystemic Risk (company-specific vs. market; theoretical justification for using mutual funds)
  • Managing Risk (asset allocation)
  • Risk Tolerance (age in bonds (Bogle), ability, willingness and need (Swedroe)
  • Risk vs. Uncertainty (Knight, Bogle, Swedroe))
  • Long-Term Risk (stocks are risky in long run: BKM, Bodie, Bogle?, Bernstein)

--Kevin M 14:22, 29 March 2012 (CDT)

Consider the relative level of difficulty for new investors. I don't think they want to see a full treatise on risk theory when all they need to know is that stocks have a better chance of losing money than other investments. This page should be aligned with Behavioral pitfalls (previously Risk, Uncertainty, and Behavioral Pitfalls) --LadyGeek 15:53, 29 March 2012 (CDT)

Agreed that it should not get too complex. Don't agree with the second statement. I spend a lot of time helping novice investors, not just on the forum, and there's a lot more they need to know about risk than that stocks can lose more money than bonds (stocks aren't the only investments that can lose a lot of money). Also disagree about alignment with the other risk article. There are two many articles with the word "risk" in them, and none of them do a decent job of covering the topic adequately, for novice investors or anyone else, IMO. I can either try to fix that here, or in yet another risk article, or if no one else sees the value in it, not at all (don't mean to sound defensive; it's just taking so much time and energy explaining what I'm trying to do that I can't actually make any progress on doing it). It's turning out to not be so easy to "be bold". --Kevin M 18:25, 29 March 2012 (CDT)

OK, I see your perspective and understand your approach. There's no need to spend any more time explaining. I'll help with formatting and minor corrections, if needed. --LadyGeek 19:50, 29 March 2012 (CDT)


Here, we can include links to papers which may be candidates for suitable references or as candidates for further reading.


1) The current page only presents one specific definition of risk that is mostly centered on "risk" as "volatility".

But, risk can also be defined as the "possibility of loss".

An interesting definition for "risk" is that of Zvi Bodie who writes:

A few proposed definitions of risk that commonly surface include: the unknown; the chance that something harmful may happen; uncertain outcomes that may cause loss; and uncertainty that arouses fear.

Let’s discard the idea that risk is nothing but the unknown, because risk is more than the ordinary uncertainty that surrounds our lives. By referring to harm, loss, and fear, the next three suggestions reflect one fundamental property of risk: Somebody has to care about the consequences if uncertainty is to be understood as risk.

The notion of “caring” or “mattering” is central. It captures both the potential (objective) impact of uncertainty as well as its (subjective) bite. This brings us close to the definition we’ll adopt: Investment risk is uncertainty that matters. There are two prongs to this definition—the uncertainty, and what matters about it—and both are significant.

So, beyond the odds of hitting a rough patch, there are the consequences of loss to consider.[1]

2) The presented definition of risk makes the same mistake as rookie investors: it only considers the risk of assets and ignores investor-related risks. In other words, it assumes that the investor's financial plan is fixed and won't unexpectedly change. Risk should include such concepts as "change of plans risk".

3) The idea of using "expected returns" to define "risk" can be debated. It would be best to clearly identify that there are at least two main school of thought, about risk: a "loss that matter avoidance" school, and an "expected return"-based school.

I haven't seen any mathematical proof that somebody actually knows what the effective "expected returns" of broad markets are. What I've seen is various conflictual estimates by various people and firms. There's no agreement on these estimates. This shouldn't be surprising because, (1) the word "expected" is used with its economics/probabilistic/statistical meaning, instead of the meaning (of actually expecting something) generally used by normal people (e.g. non-economists) and (2) the idiom "expected returns" hides the fact that it's no more than an "intelligent guess using metrics derived from empirical analyses of historical return data". --longinvest 16:58, 29 July 2019 (UTC)

  1. Risk Less and Prosper, Zvi Bodie and Rachelle Taqqu, 2012.