Step 11: Risk Exposure
contribution plans, church funds, college endowments, and any other funds governed by committees. As presented in Step 8, Nobel Prize-winner Eugene Fama and professor Kenneth French identified that as much as 96% of equity returns are explained by a portfolio’s exposure to market, size and value. Their research expanded upon Markowitz’s and Sharpe’s initial findings regarding risk and return. While Fama and French demonstrated that indexes constructed of small and value companies have historically outperformed the total market index over the long term, the risks associated with these small and value indexes have also been higher.
Problems Investors Unknowingly Take The Wrong Risks Some investors tend to avoid risk when it comes to their investments. They want high returns with low risks, but avoiding risks position investors to avoid returns. Some take on too much risk, while others take risks that just haven’t been properly rewarded. All these wrong risk behaviors are the crux of the poor performance many investors experience. Risk should be embraced in appropriate doses that match an investor’s risk capacity. There is a right amount and type of risk for every investor. Risk provides opportunity, and a taste for appropriate risk is a good thing. As was shown in Step 9, certain asset classes, such as small and value, have had a long history of sufficiently rewarding investors for the risks associated with them. However, there
Published on Jun 1, 2015
This book reveals the potential land mines and pitfalls of active investing and educates readers on the benefits of passive investing with i...