“It’s simple: If riskier investments reliably produced higher returns, they wouldn’t be riskier”- Howard Marks
Quite a number of people claim that the more risk you take , the higher your returns; Riskier investments provide higher returns.
This doesn’t make sense simply because if riskier investments reliably produced higher returns, they wouldn’t be riskier! It should rather be said that riskier investments have to offer the prospects of higher returns. ( There is absolutely nothing to say that those higher prospective returns will materialize)
Many academics claim that risk equals volatility. This is not true, rather risk is the likelihood of loosing money. Investors care more about loss of capital than price fluctuations.
Why volatility can’t be the definition of risk:
a.) A stock that moves from $50 to $80 and one that moves from $50 to $30 both have the same statistical volatility
b.) The future will not be like the past. The issue is that we look at historic volatility as an indication of future risk
Measuring Risk: Risk isn’t quantifiable but is rather a matter of opinion. This may be the reason why many academics settle on volatility as a proxy of risk. This is because volatility is objectively quantifiable while risk isn’t.
