Standard deviation, also known as volatility, tends to be a popular measure of risk because it can be easily quantified through historical return data. Based on prior returns, the standard deviation is a guide on how much variance there will be in return from one year to the next; a low standard deviation indicates little variance and a high standard deviation indicating much variance. When investments are qualified on a spectrum of low to high risk, it is usually with respect to standard deviation.
However, it is important to note that volatility is only one type of risk and evaluating an investment based on one risk metric alone does not paint a complete picture. This means that in order to adequately and properly evaluate any investment it is crucial to evaluate the many different elements of risk involved.
At Capstone, we have a process that assigns detailed rankings to the different types of risk in order to better place the overall risk in context. We evaluate potential investment opportunities independently, but we also assess how a particular investment fits in with the underlying investments within our existing Funds. The inclusion or exclusion of any investment opportunity will affect the overall risk, and more importantly, the Sharpe ratio – the return achieved per unit of risk where a higher number is better.
When you understand the risk profile of your investments, you will better understand how your portfolio has been constructed to meet your personal objectives.
Janet Kim Sing, Portfolio Manager
Capstone Private Wealth