RiskMetrics - Introducing RiskGrades


Introducing RiskGradesTM

A universal risk measure

RiskMetrics introduced RiskGrades to address investors' need for a consistent and reliable way to measure market risk. RiskGrades are a new statistic that allows for risk comparison across all asset classes. Like standard deviation, RiskGrade quantifies the volatility of financial assets. RiskGrades, however, are calibrated to be more intuitive and easier to use than standard deviations. RiskGrades can range from 0 to over 1000, where 100 corresponds to the average risk of a diversified market-cap weighted index of global equities.

Comparable across assets

RiskGrades are a standardized measure of volatility, and therefore allow an "apples to apples" comparison of investment risk across all asset classes and regions. Thus, we can say that a Brazilian stock with a RiskGrade of 300 is six times as risky as an Asian Bond Fund with a RiskGrade of 50. Furthermore, RiskGrades capture all components of market risk: equity, interest rate, currency, and commodity risk.

Risk tolerance

The RiskGrade scale below compares the relative risk of some major asset classes. Conservative investors usually don't venture much beyond major government bonds, which typically have a RiskGrade below 30, while aggressive investors are comfortable with high tech stocks like Yahoo!, which often have RiskGrades in excess of 300.


RiskGrades are dynamic

RiskGrades are not constant through time, and adjust to current market conditions: during turbulent times, such as the Asian Crisis or the Russian devaluation, RiskGrades of major stock markets can easily escalate beyond 200 to reflect higher risk, while calmer markets could yield RiskGrades below 80.

Calculating RiskGrades

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