How do you evaluate or quantify risk in an investment?

Oldman answered one year ago …

This is a very broad question, but I'll attempt to cover one area; portfolio risk or the alpha vs. beta of a portfolio (its gains vs. its volatility). Let us suppose we have an index of all stocks with no fees, no trading expenses, no 12b-1 charges, no brokerage costs...and we purchase , in proportion to the instantaneous pricing of every security in that indeex, a fractional share of the securities held by the index...we could call that a total stock index share, an exchange tradable ETF with the TSIS moniker.

When the total market increased in value, the TSIS would go up, proportionally, and vice versa. TSIS' beta would be = to its alpha and both would be numerically = 1.00.

Hoewever, there is not efficient instantaneous, cost-free and unbiased market pricing for all or any basket of securities, so generally, the gain from a group is less than the pricing, because of fees for trading and sales, and dividend, etc costs. So, for a real total market index, say Vanguard's (or other companies' more recently), gains are less and losses are greater. In other words, alpha is lower than the variance or beta of the holdings. Over many decades, the total market index...had it been around, would have performed (gained) more than a total BOND Index.

Aha!. I'll put more into stocks than bonds...but the bonds variance in returns is much smaller than that of stocks, so, If I want a "balanced portfolio", where the high interest rates that drive down stocks and make bonds appear more worthy, can be balanced with a growthy stock selections, so that as interest rates fall, and the bionds go up in price I can sell them, to buy speculative securities...and so modern portfolio theory was born...to balance "risk"...which used to be the return variation compared to "RISK_FREE" U.S. Treasuries. HaHa! ((Yeah, you'll get your dollar back in 30 years or less, but it will only buy 25 cents of stuff when you redeem the bond! LOL {lots-of-luck and laughing-out-loud}).

So now you factor the isidious effects of average inflation...you need about 3-4% yield above a risk-free investment, and perhaps another x-percent to compensate for taxation of the Alpha. [Of course you can switch to homebrew Chase&Sanborn vs the Latte at *Bucks, but you can't spit in your auto's fuel tank and get the meter to read "Full"] This' is known as a negative hedonic adjustment to the famously flawed "CPI".

So now you tilt towards more variable returns in commodities, currencies and countries (The "Triple C" of the current depression), in the hopes of getting a bigger return for the investment.

You are now "DIVERSIFIED"...your risk is spread among various types of investments, some of which will zig while others zag. BUT you still have NO ALPHA...until you sell. (Which is often forgotten by the charting crews).

When you sell, and withhold the tithes to Caesar, and factor in the aggravation of research and worry that you've invested, which may have kept your cerebral cortex from the degenerative LLFS ("Lower-Lip-Flipping Syndrome), while it certainly aged your nucleus accumbens (the planning center) not to mention the jazzing of the gyri of the frontal cortex (the gloating center) [which actually does suppress the hippocampus - the memory center - from remembering why you purchased that position in the first place}...so you can sleep better tonight.

But now, you face the risk of "opportunity"...what to do with your gains, to preserve the weeny amount of alpha the law and chance have provided you, a morsel of reward in a maelstrom of diverging advice.

For a historical ssessment of Risk vs. Reward ...in the broadest sense- go to

http://seekingalpha,com/article/81330

and work backward from there (it was published withi the last two days.)

I'm very cynical about questions like this, because over the past 50 years or so of my real investing, I've been well rewarded, for diversifying my risks among the various kinds of investments available at the times. I don't calculate risk, because that's what provides reward. You want low risk, get a concrete culvert, lie down in it and have a friend fill it with quikset cement.