Risk and Volatility
Trust Management Educational Series
There are many risks of investing, such as getting a lower return than expected, the market price falling below the original purchase price, and the value of the investment being volatile.
Volatility is the extent to which the price of an investment fluctuates. Some investments are much more volatile than others.
In the last eight years, the volatility of Xero shares has been 53% per annum. The volatility of Auckland Airport shares has been 16% per annum, so they are likely to be less risky than Xero in the future.
How is volatility calculated?
Volatility can be calculated by using the monthly returns on an investment. The average level of returns, and how much they vary between months, is used to calculate the volatility.
Asset Class Volatility
The table below shows the volatility of return of several asset classes for the ten years to August 2015. Asset classes that are more volatile are expected to generate higher returns, because investors need to be compensated for the higher risk.
How is volatility useful?
The historical volatility of an asset usually provides a good guide to its risk in the future, so is a useful tool when constructing a portfolio.
Volatility and Charities
Most charities depend on their investment returns to fund their good works, so seek stable returns. That does not mean charities should avoid investment in share markets, but that such investments should be balanced by investment in other types of assets (please refer to our article on diversification and asset class correlation).
Want to know more?
Trust Management provides advice to charities on managing their investment portfolios and their risks. This includes determining an appropriate asset allocation, and tools to manage the risk of the portfolio.
If you have any questions, or would like to know more about how to manage your investment risks, please do not hesitate to contact John Williams on (09) 550 4046.