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Quantitative Measures of Mutual Fund Risk: An Overview
Jan 1, 1997
Three approaches to forecasting risk include historical standard deviation, applying style analysis to historical returns to separately forecast style and selection risk, and analyzing portfolio holdings. The third approach, analyzing holdings, is the most accurate and the most costly. It is the standard choice of institutional investors. This paper will review how institutional investors have analyzed risk, and then discuss the advantages and disadvantages of these three particular approaches to mutual fund risk for individual investors. The paper will also include a brief historical perspective, review the many definitions of risk, and discuss several issues of general concern for risk analysis.