Investment Risk and Risk Classes

Thursday, October 01, 1998 » posts.tags:

This paper aims to present a risk classification that can be used for all investment funds and that is close to what the investor perceives as “risk”. The method further tries to use as few arbitrary parameters as possible and the assumptions are limit to the maximal extend. We present one graphical method that could be used in a discussion with the investor, and a risk classification that is so simple that it can be used on written communication. Ideally the risk class should be printed on each fund information sheet, so that investors can compare all investments over all different distributors.

NOTE: this is an old paper, though this paper is still interesting reading, please take the following into account: - Recent research points rather in the direction that a risk scale at the level of the investment itself might not make much sense. An investment is risky or not depending on the details of the investment goal! - That paper misses an extremely important link to other papers from that time and more concretely to the paper “Thinking Coherently” (Artzner, Delbaen, Eber and Heath — 1997). This paper erroneously selects Value at Risk (VaR) as a risk measure. VaR is not a coherent risk measure and should not be used (certainly not at the level of individual investments).