Measuring Risk With The Normalized Risk Index by Mike B. Siroky, MD
Risk—there are many ways to measure it, but how effective are they? Here’s one measure that is versatile and suitable for just about any type of risk profile.
What is risk and how is it best measured? The term risk is generally applied to adverse outcomes only. No one talks about the risk of winning the state lottery, but it is common to hear about the risk of getting hit by lightning. In the financial arena, risk may mean the likelihood of bankruptcy, a dividend cut, or a decline in earnings. In modern portfolio theory, it may mean a high beta, or the likelihood of underperforming a market index or some target return. However, to most individual investors, the term risk means the likelihood of losing capital ...