In episode 5, we saw how standard deviation is used as an objective, statistical measure of investment risk. That is the quantitative side. Number crunching.
To assess the qualitative aspect of an asset’s risk, and to better build the standard deviation, investment risk is usually broken into two components. Nonsystematic and systematic risks.
In this episode, the focus is on the nonsystematic risk factors.
What is a nonsystematic risk? Also known as asset specific or diversifiable risk.
What are the key nonsystematic risks?
How should investors analyze these risks?
Why is it important to factor these risks into your business and investing decisions?
Episode 5 on the Wilson Wealth Management YouTube channel looks at standard deviation as an objective measure of investment risk.
Comparing investment risk between assets is difficult. There are so many different asset classes, subclasses, geographies, capitalizations, maturity dates, etc. Each with its own unique risk-return profile and factors.
Assessing investment choices becomes an “apples to oranges” proposition.
So how do investors turn analysis into “apples to apples” comparisons?
Through the use of standard deviations. This statistical measure, as well as risk-return ratios utilizing standard deviation, help investors more objectively compare highly varied assets.
In this episode, we look at this concept, some common risk/return ratios, and limitations in using standard deviation as a risk measure.