## Principles of a good risk metric

- forward-looking;
- long-term; and
- focused on outcomes – in other words on the destination, not the journey.

## Oxford Risk's definition of investment risk

Historical volatility may be ubiquitous in the investment industry, but it’s hardly relevant to most people.

Worse, short-term volatility is unstable, so that the same portfolio ends up with a different risk rating over time, sometimes within months!

We therefore define investment risk as the **annualised standard deviation of ex-ante (i.e. forward-looking) long-term returns**. By 'long-term' we mean 10 years.

## Standard deviations of outcomes, not during a period of time

While volatility – standard deviation of returns *along* a period of time – is very strongly related to the uncertainty of future outcomes, it is not quite the same thing.

By risk, we mean the chance of both good and bad outcomes – variability in destination, not the bumpiness of the journey.

We therefore use the standard deviation of such outcomes, because as a statistic it succinctly does the job of capturing the essence of that 'unknowableness' of the future.

## Why use ex-ante (forward-looking) returns?

- it assumes that the future will be a repeat of the past; and
- there is not enough history to measure long-term returns (without overlapping periods to an egregious extent).

*across*these simulations.

## Why long-term?

Investing in multi-asset portfolios should really only ever be about the long-term.

In the short-term, there is so much noise to contend with – only over a full economic cycle does the stock market turn from a 'voting machine' into a 'weighing machine', to borrow from Benjamin Graham's famous metaphor.

We should therefore measure risk over an appropriately long time horizon. While it is hard to define what is precisely 'long', we say that 10 years is adequately long enough.

## Why annualised?

We present the figure annualised to render it independent of the time horizon under consideration.

It also enables a straightforward interpretation of the risk metric as the amount by which we would expect annual returns to deviate from their anticipated trajectory (plus or minus), two-thirds of the time.

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