Risk_Premium_201

Equities are an asset that represents the present value of a discounted flow of cash flows generated by corporations. The value of these assets is driven by a combination of policy rates, nominal GDP, profitability, and liquidity conditions. Maintaining a durable edge in equities requires a view of all of the above.

A portfolio can be set up to withstand 99 percent of all scenarios but succumb because it’s the remaining 1 percent that materializes. Based on the outcome, it may seem to have been risky, whereas the investor might have been quite cautious. • Another portfolio may be structured so that it will do very well in half the scenarios and very poorly in

In the absence of the ability to see the future, how can we position our portfolios for what lies ahead? I think much of the answer lies in understanding where the market stands in its cycle and what that implies for its future movements. As I wrote in The Most Important Thing, “we may never know where we’re going, but we’d better have a good idea

Investors are generally risk averse, which means they don’t like risk. Risk is measured by volatility or standard deviation. The more unpredictable the returns of an investment, the riskier that investment is. So, if your investment adviser/portfolio manager earns you an 11% total return for the year, you can then adjust that number for the risk it