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 shown above. We now drawn an uninterrupted line from investors to investments, backed up with sound reasoning.