Assess Your Risk

摘要

It's A. fundamental principle of investing that raw performance doesn't tell you how good a stock picker is. You have to know how much risk he took to get that return. In a bull market a subpar player can have a terrific gain just by buying on margin―or buying high-risk stocks. In the late 1990s some mediocre Wall Streeters looked for a while like geniuses just by going heavily into Nasdaq stocks. You know what happened to them. This principle of comparing risk and reward is enshrined in the various rating systems for mutual funds. This magazine, for example, grades funds separately for bull- and bear-market performance; if a seemingly hotshot fund boasts of a terrific ten-year gain but gets a FORBES D or F in down markets, then it was taking big risks with customers' money and doesn't deserve any of yours. Morningstar rates funds with a formula that penalizes gamblers and rewards the steady performers. A similar methodology is incorporated in the widely used Sharpe ratio, named after Nobel economist William Sharpe. Sharpe divides a portfolio's excess return (return less the riskless T bill return) by its volatility.