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Risk Capital and Markets: A Temporary Retreat or Long Term Pull Back?

by Aswath Damodaran

As inflation has taken center stage, markets have gone into retreat globally, and across asset classes. In 2022, as bond rates have risen, stock prices have fallen, and crypto has imploded, even true believers are questioning what the bottom for markets might be, and when we will get there. While it is easy to call the market movement in 2022 a correction and to argue that it is overdue, it is facile, and it fails to address the question of why it is happening now, and whether the correction is overdone or has more to go. In this post, I will argue that almost everything that we are observing in markets, across asset classes, can be explained by a pull back on risk capital, and that understanding the magnitude of the pull back, and putting in historical perspective, is key to gauging what is coming next.

Risk Capital: What is it?

To put risk capital in perspective, it is best to start with a definition of risk that is comprehensive and all-inclusive, and that is to think of risk as a combination of danger (downside) and opportunity (upside) and to consider how investments vary in terms of exposure to both. In every asset class, there is a range of investment choices, with some being safer (or even guaranteed) and others being riskier.

Risk capital is the portion of capital that is invested in the riskiest segments of each market and safety capital is that portion that finds its way to (Read more...)

Data Update 4 for 2022: Risk = Danger + Opportunity!

by Aswath Damodaran

In the first few weeks of 2022, we have had repeated reminders from the market that risk never goes away for good, even in the most buoyant markets, and that when it returns, investors still seem to be surprised that it is there. Investors all talk about risk, but there seems to be little consensus on what it is, how it should be measured, and how it plays out in the short and long term. In this post, I will start with a working definition of riskt that we can get some degree of agreement about, and then look at multiple measures of risk, both at the company and country level. In closing, I will talk about some of the more dangerous delusions that undercut good risk taking.

What is risk?

In the four decades that I have been teaching finance, I have always started my discussion of risk with a Chinese symbols for crisis, as a combination of danger plus opportunity:

Over the decades, though, I have been corrected dozens of times on how the symbols should be written, with each correction being challenged by a new reader. That said, thinking about risk as a combination of danger and opportunity is both healthy and all encompassing. It also brings home some self-evident truths about risk that we all tend to forget:

  1. Opportunity, without danger, is a delusion: If you seek out high returns (great opportunities), you have to be willing to live with risk (great danger). In fact, (Read more...)

Data Update 4 for 2022: Risk = Danger + Opportunity!

by Aswath Damodaran

In the first few weeks of 2022, we have had repeated reminders from the market that risk never goes away for good, even in the most buoyant markets, and that when it returns, investors still seem to be surprised that it is there. Investors all talk about risk, but there seems to be little consensus on what it is, how it should be measured, and how it plays out in the short and long term. In this post, I will start with a working definition of riskt that we can get some degree of agreement about, and then look at multiple measures of risk, both at the company and country level. In closing, I will talk about some of the more dangerous delusions that undercut good risk taking.

What is risk?

In the four decades that I have been teaching finance, I have always started my discussion of risk with a Chinese symbols for crisis, as a combination of danger plus opportunity:

Over the decades, though, I have been corrected dozens of times on how the symbols should be written, with each correction being challenged by a new reader. That said, thinking about risk as a combination of danger and opportunity is both healthy and all encompassing. It also brings home some self-evident truths about risk that we all tend to forget:

  1. Opportunity, without danger, is a delusion: If you seek out high returns (great opportunities), you have to be willing to live with risk (great danger). In fact, (Read more...)

How Differentiated Insights Lead to a Stronger Financial Portfolio

by Sponsored Content

The following content is sponsored by MSCI

How Differentiated Insights Lead to a Stronger Financial Portfolio

Differentiated Insights Lead to a Stronger Financial Portfolio

How can wealth managers build better portfolios for a better world? It all begins with the right insights. Using risk and return analytics, along with climate and ESG considerations, wealth managers can:

  • Propose compelling solutions
  • Build stronger portfolios
  • Monitor portfolio performance

In this graphic from MSCI, we show how financial portfolio insights help a wealth manager meet their clients’ needs at each step of the process.

Insights in Action

Let’s look at how these benefits take shape for a hypothetical client and their wealth manager.

  • Client: Faye
  • Investable assets: $1 million
  • Risk tolerance: Medium
  • Preferred strategy: ESG integration

Given this profile, a variety of financial portfolio insights will help Faye understand how a new solution meets her needs.

Build a Strong Financial Portfolio

In the first stage, the wealth manager will begin building a model portfolio by conducting research and risk/return analytics. A stress test shows that the constructed model portfolio would have performed better than its benchmark during historical market downturns.

Downturn EventPortfolio ReturnBenchmark Return
Global Financial Crisis (2007-2009)-34.7%-36.4%
Oil Crisis (1972-1974)-29.3%-31.4%
Argentine Economic Crisis (2000-2002)-23.9%-24.2%
Dot-com Slowdown (2001)-22.2%-24.2%
Market Crash (Oct 14-19, 1987)-15.0%-16.9%

Financial portfolio construction can also include analyzing exposure to factors, or the investment characteristics that drive risk and return.

To take ESG into account, the wealth manager compares an ESG model portfolio to one of their (Read more...)

RiskGrade: A More Intuitive Way to Calculate Investment Risk

by Sponsored Content

The following content is sponsored by MSCI.

A More Intuitive Way to Calculate Investment Risk

What crucial factors come into play when choosing investments?

At a high level, there’s two sides to the equation: return and risk. While potential profit is important, the volatility or risk of those profits also plays a critical role. In this graphic from MSCI we introduce the RiskGrade™ metric, a more intuitive way of calculating investment risk.

What is RiskGrade™?

One way of measuring investment risk is through volatility. Low risk investments have a smaller range of price movements relative to their historical average, meaning they have less volatility. On the flip side, high risk investments have a larger range of price movements. This means their returns—both gains and losses—can differ substantially from the historical average.

Traditionally, this volatility is measured through standard deviation. However, standard deviation can be difficult for investors to interpret as it has no intuitive reference point. Enter RiskGrade: a score-based measure of volatility that uses a transparent methodology.

  1. Volatility is calculated by measuring the change in investment price over time.
  2. A scaling factor is applied to standardize scores.

In the second step, 100 is equivalent to a 20% standard deviation, which is the average long-term volatility of global equities. Cash would have a RiskGrade of 0, whereas a technology IPO may have a RiskGrade that exceeds 1,000. It should be noted that RiskGrade only captures risk from a market price perspective, and does not consider inflation risk.

(Read more...)

SpecTrust raises millions to fight cybercrime with its no-code platform

by Mary Ann Azevedo

Risk defense startup SpecTrust is emerging from stealth today with a $4.3 million seed raise and a public launch.

Cyber Mentor Fund led the round, which also included participation from Rally Ventures, SignalFire, Dreamit Ventures and Legion Capital.

SpecTrust aims to “fix the economics of fighting fraud” with a no-code platform that it says cuts 90% of a business’ risk infrastructure spend that responds to threats in “minutes instead of months.” 

“In January of 2020, I got a bug in my ear to, instead of an API, build a cloud-based service that handles all this complex orchestration and unifies all this data,” said CEO Nate Kharrl, who co-founded the company with Bryce Verdier and Patrick Chen. “And, it worked. And it worked fast enough that you can’t even tell it’s there doing its work.”

For example, he says, SpecTrust even in its early days was able to pull identity behavior information in seconds.

“Today, it’s more like five and seven milliseconds,” he said. “And, engineers don’t have to lift anything or adjust data models.”

Since the San Jose, California-based startup’s offering is deployed on the internet, between a website or app and its users, an organization gets fraud protection without draining the resources of its engineers, the company says. Founded by a team that ran risk management divisions at eBay and ThreatMetrix, SpecTrust is banking on the fact that companies — especially financial institutions — will be drawn to the flexibility afforded by a no-code offering.

Don’t hate (Read more...)

SpecTrust raises millions to fight cybercrime with its no-code platform

by Mary Ann Azevedo

Risk defense startup SpecTrust is emerging from stealth today with a $4.3 million seed raise and a public launch.

Cyber Mentor Fund led the round, which also included participation from Rally Ventures, SignalFire, Dreamit Ventures and Legion Capital.

SpecTrust aims to “fix the economics of fighting fraud” with a no-code platform that it says cuts 90% of a business’ risk infrastructure spend that responds to threats in “minutes instead of months.” 

“In January of 2020, I got a bug in my ear to, instead of an API, build a cloud-based service that handles all this complex orchestration and unifies all this data,” said CEO Nate Kharrl, who co-founded the company with Bryce Verdier and Patrick Chen. “And, it worked. And it worked fast enough that you can’t even tell it’s there doing its work.”

For example, he says, SpecTrust even in its early days was able to pull identity behavior information in seconds.

“Today, it’s more like five and seven milliseconds,” he said. “And, engineers don’t have to lift anything or adjust data models.”

Since the San Jose, California-based startup’s offering is deployed on the internet, between a website or app and its users, an organization gets fraud protection without draining the resources of its engineers, the company says. Founded by a team that ran risk management divisions at eBay and ThreatMetrix, SpecTrust is banking on the fact that companies — especially financial institutions — will be drawn to the flexibility afforded by a no-code offering.

Don’t hate (Read more...)