Risk "drag" in investing, poker

[NajdorfDefense]

compound/geometric return is the correct metric, not average annual.

Increased risk <> increased return, ceteris paribus, otherwise you could spend the rest of your $$$ on lotto tix tonite and go home happy.

Vol <> risk.

[Scorpion Man]

[ QUOTE ]
compound/geometric return is the correct metric, not average annual.


Increased risk <> increased return, ceteris paribus, otherwise you could spend the rest of your $$$ on lotto tix tonite and go home happy.

Vol <> risk.

[/ QUOTE ]

I think I have seen you write this elsewhere. Can you elaborate, please? I just got off the phone with some hedge fund PhDs...my understanding is that volatility = one standard deviation of returns (assuming log normal distribution).

Chapter 3 of Grinold and Kahn -- Active Portfolio Management...its the standard textbook ... "risk is the standard deviation of return"

I guess that risk does not have a single definition.
Volatility is a FORM of risk.
Barra (popular wall street quant software) breaks risk into 68 different factors (industry, country, cap, style, etc).

In a general sense, risk is anything that can happen that you cannot predict.

Volatility is not the ONLY kind of risk...there is a Sortino ratio that adjusts for upside moves versus downside moves...i.e. if you have a fund that is always up but how much it is up changes a lot...this is a "risky". That goes against how most of us would think about "risk". Sortino adjusts for this.

So, most of us are worried about "downward volatility". That said, at first blush volatility of return is a good proxy for risk.

My buddies are saying there is no standard mathematical definition of "risk". Many people substitute volatility for this in practice.

My friend, who runs $1b hedge fund and owns it 100%, says in his opinion most folks who run portfolios and quant funds (he has quant as well as long/short) would say risk = volatility.

That is also how we looked at it in my shop...but we were not very quant oriented.

Dan

[edtost]

my understanding:

for most institutional investors, risk = vol or tracking error from an index

for most individuals, the best metric for judging risk on their psycological utility functions is drawdown.