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By Dr Bert Flossbach, Flossbach von Storch Invest S.A.
For investors, it is crucial to distinguish actual investor risks from usual price fluctuations. To do this, they must be able to assess the quality and valuation of their assets as precisely as possible.
Modern portfolio theory has made volatility (price fluctuations) the decisive, if not even the sole measure of risk in the past few decades. It is easy to measure and is extremely suitable for quantifying the abstract concept of “risk”. Academics therefore love it – but there are two clear disadvantages.
Volatility is pro-cyclical and misleading as a measure of risk.
Firstly: Volatility is pro-cyclical. It is always particularly high when prices have already...
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