Limitations of Risk Analysis

Outstanding investors, in my opinion, are distinguished at least as much for their ability to control risk as they are for generating return.

What ever few awards are presented for risk control, they’re never given out in good times. Th e reason is that risk is covert, invisible. Risk— the ...

• Risk exists only in the future, and it’s impossible to know for sure what the future holds. 
• Decisions whether or not to bear risk are made in contemplation of normal patterns recurring, and they do most of the time. 
• Projections tend to cluster around historic norms and call...

Given the difficulty of quantifying the probability of loss, investors who want some objective measure of risk- adjusted return— and they are many— can only look to the so- called Sharpe ratio. This is the ratio of a portfolio’s excess return (its return above the “riskless rate,” or the rate on ...