RiskMetrics - Using RiskGrades to measure portfolio risk
- Introduction to Risk
- What is Risk?
- Risk and Opportunity
- Risk Preference
- Risk and Performance
- Importance of Risk
- Market Risk
- Event Risk
- Unique vs. systemic risk
- Sources of Risk
- Why Measure Risk?
- Introducing RiskGrades
- Using RiskGrades
Using RiskGrades to measure portfolio risk
Learn how to apply RiskGrades to measure and interpret your own portfolio risk
Total portfolio risk
RiskGrades allow you to measure the risk of a single asset or your entire portfolio. You can spot your riskiest holdings, evaluate your overall portfolio risk level, and compare your risk against others.
In the sample portfolio below, Yahoo! stock is by far the most volatile holding: it's RiskGrade of 400 is more than twice as high as GE's 195 RiskGrade. The second riskiest is the Internet Fund (WWWFX), whose 262 RiskGrade is about twice as volatile as the Vanguard's S&P 500 Fund (VFINX). Cash carries a RiskGrade of 0, since it has no market risk. In this example, your total portfolio RiskGrade is 154, which means that you can expect its value to be around 1.54 times as risky as a portfolio of global stocks during normal market conditions.
Your total RiskGrade will always be less than the weighted average of individual RiskGrades due to diversification. You can significantly reduce risk by holding many independent assets instead of just a single stock. The diversification benefit for your portfolio RiskGrade is simply the difference between the computed portfolio RiskGrade and the market-value weighted average of the individual asset RiskGrades. For example, the above diversification benefit of 43 shows that diversification has made the portfolio about 22% less risky (i.e., without diversification the portfolio would have had a RiskGrade of 154 + 43 = 198, so the percentage risk reduction was 43/198 = 22%).
When evaluating how much risk you're taking, you may find it interesting to compare your risk level against others:
Get your own RiskGrade
For example, the above Risk Ranking implies that Joe R. Grade's portfolio was below average compared to his peers (55% took more risk, 45% took less risk).