Could MSCI RiskGrade offer Investors and traders a fast and maybe more efficient way of calculating risk?
So, the two main factors in the equation when deciding investments are risk and reward or return.
In this piece, we are going to focus on risk, and how it is measured
“Could MSCI RiskGrade offer Investors and traders a fast and maybe more efficient way of calculating risk?”
WEALTH TRAINING COMPANY
RiskGrade measures risk by examining the level of volatility of the asset.
What calculating scheme does RiskGrade use to measure risk?
RiskGrade uses a score-based measure of volatility using a transparent methodology.
One hundred equals 20% standard deviation, which is the average long-term volatility of global assets.
A higher level of risk is reflected by having a higher number assigned with a risk score of 0 being least risky and 1000 having the highest risk score.
So, cash would have a RiskGrade of 0, whereas a technology IPO may have a RiskGrade that exceeds 1,000.
“RiskGrade uses a score-based measure of volatility using a transparent methodology”
WEALTH TRAINING COMPANY
What score has RiskGrade assigned to various investments over the last decade?
US corporate fixed income has a RiskGrade score of 25, a 60/40 blended portfolio has a score of 47. Global equities and US equities have a RiskGrade score of 71.
The US REITs (real estate investment trusts)have a score of 84, Emerging Market equities have a score of 89.
Then there are smalls caps with a RiskGrade score of 93, long-term average global equities have a score of 100.
RiskGrade also assigned a score to popular stocks. For example, Apple has a score of 140, and GameStop stock scores 259.
“RiskGrade changes over time based on market conditions” – Wealth Training Company
Here are a few observations we have noted from the RiskGrade methodology of calculating risk
US corporate fixed income was one-quarter as risky as the long-term average of global equities and real estate investment trusts (REITs) were 18% riskier than US equities.
Moreover, RiskGrade changes over time based on market conditions. For example, based on a five-year time interval’s RiskGrade score has climbed more than 250% since 2010.
So, of the above examples, GameStop stock had the highest investment risk, with a RiskGrade more than 2.5 times higher than the long-term average for global equities.
RiskGrades are not static and change over time depending on market conditions
GameStop, which saw heightened volatility as individual investors created a short squeeze, is a good example of the fluidity of RiskGrades. Based on 5-year intervals, the stock had a RiskGrade of 212 from 2006-2010, and a RiskGrade of 749 from 2016-March 31, 2021—a jump of over 250%.
RiskGrade plays an important role in investor’s decision-making process, helping investors allocate capital flows into assets
If anything, RiskGrade helps investors to easily understand risk and adjust their portfolios’ risk tolerance and goals.