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Quantifying Measures of Risk in Investments

[quote] The following material is not for the faint of heart. Some of it will be a little overly technical, but I hope it will be fully understandable. I will do the best I can to explain things in plain English vs. industry speak.

The premise of this White Paper is that most advisors and certainly most clients do not understand the dynamics between risk taken vs. expected investment return. In short, most clients are taking far too much risk in their portfolios for the expected return they hope to achieve.

It really boils down to whether you and your clients agree with the following statement: Investors should take the least amount of risk to reach their investment goals.

If you do not agree with that statement, then you really have no business reading or caring about what’s in this White Paper.

Put in another question form: Why would someone invest in something more risky if the potential return is the same as a lower risk investment? The logical answer from any sane person would be, they wouldn’t.

Working on the assumption that it is always better to invest in something less risky than more risky if the potential return is the same, what needs to be done next is figure out how to measure the risk of an investment.

It sounds like a simple enough task, right? It should be easy to measure the risk of an investment. Sadly, that is not the case. There are more ways to measure the risk of an investment than you can imagine. [quote]

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