Today’s post rolls out the inaugural Risk Review column for the major asset classes, a monthly update that’s the companion piece to the monthly performance report and risk-premia estimates. Readers can use this trio for a quick summary of historical and expected return and how that compares with several measures of risk.
Risk analysis is a broad and deep subject and so this monthly update will be no one’s idea of a comprehensive treatment. Rather, the goal is to offer a comparison of the major asset classes in one fell swoop for a range of metrics – a comparison that’s not exactly ubiquitous among the usual suspects for financial news.
With that in mind, the table below highlights several flavors of risk for the trailing 10-year window through the end of last month (Apr. 30, 2021). For perspective on how risk stacks up relative to performance, the assets are ranked by trailing 10-year annualized return. For the underlying indexes that represent the asset classes, you can refer to the table in this companion article.
For a bit of historical context on how risk has evolved, a regular feature in this update will be a chart of rolling 3-year annualized Sharpe ratio for US stocks (Russell 3000 Index), US bonds (Bloomberg Aggregate Bond Index) and the Global Market Index (GMI), an unmanaged, market-value-weighted portfolio that holds all the major asset classes (except cash) and represents a theoretical benchmark of the “optimal” portfolio.
For reference, here are brief definitions of each risk metric:
Volatility: annualized standard deviation of monthly return
Sharpe ratio: ratio of monthly returns/monthly volatility (risk-free rate is assumed to be zero)
Sortino ratio: excess performance of downside semivariance (assuming 0% threshold target)
Ulcer Index: duration of drawdowns by selecting negative return for each period below the previous peak or high water mark
Maximum Drawdown: the deepest peak-to-trough decline
Beta: measure of volatility relative to an index (in this case GMI)
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