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Article: Mutual fund risk: standard deviation is not the answer: don't use standard deviation by itself as a measure of risk. It is misleading and wrong.
- Article from:
- Money Digest
- Article date:
- October 1, 1996
- Author:
CopyrightCOPYRIGHT 1996 Money Digest. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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LOSING YOUR CAPITAL IS THE BIGGEST RISK
What is the biggest risk you face when you invest your money in a mutual fund? Hardly anyone would deny that the biggest risk one faces in investing is losing one's capital.
One would also assume that the measure of risk calculated by many specialists would take this obvious fact into account. But, believe it or not, the most commonly reported measure of risk does not even care if you lose all your capital, as long as you lose it in a steady fashion!
STANDARD DEVIATION IGNORES THIS RISK
Most mutual fund industry analysts define risk as the unpredictability of returns. As far as they are concerned, ...