Measuring portfolio risk

All that remains is to estimate a portfolio’s risk.

To do this, we look at the mix of broad types of assets within the portfolio – for example, government and corporate bonds, developed and emerging market equities, property, and so on.

We plug the portfolios’ asset allocation into our model, and simulate many possible long-term returns. We measure the spread of these outcomes – i.e. the standard deviation – to calculate its risk.

Finally, we can compare this raw risk estimate to the risk bands. We now drawn an uninterrupted line from investors to investments, backed up with sound reasoning.