Thursday, May 08, 2008

Risk Disclosures

I had a very interesting question from a student today. We're covering portfolio theory in Financial Management, and she was looking at some of her own personal investments from this "new" point of view. In reading through the PDS (Product Disclosure Statement -- the Australian lingo for a retail fund prospectus) she saw no mention of standard deviation, correlation or beta. So how do you figure out how risky a managed fund is, and how it will interact with your current investment portfolio?

If you look at the risk discussion in any PDS, you are likely to find an abstract discussion of market risk, political risk, sovereign risk, economic risk, and/or other risks. There are hardly ever any numbers in the risk discussion at all. From a Finance Theory point of view, the risks investors need to know are total risk (standard deviation) and more importantly sensitivity to market risk (beta). A historical average beta and/or target beta ought to be required disclosures, IMHO. Does anyone agree with me?


Post a Comment

<< Home