The Evolution of Risk Evaluation

The study of risk in financial services has been a “modern” concept for decades, and it has grown to encompass dozens of risk-related elements. When it comes to understanding and measuring risk specifically within wealth management, things have really heated up only in the past 10 years.

In the classic investing book A Random Walk Down Wall Street, renowned Princeton economist and professor emeritus Burton Malkiel wrote that “both within academia and on the Street, there has long been a scramble to exploit risk to earn greater returns.”

“Risk,” he said, “is a most slippery and elusive concept. It’s hard for investors—let alone economists—to agree on a precise definition.”

Nonetheless, risk evaluation and profiling, once the province of institutional portfolio managers, has become a standard first step in portfolio construction for individuals in the past 10 years. Risk measurement has steadily increased in importance across many facets of the client lifecycle and is now being marketed and sold as everything from a means to generate new leads to a way to nudge financial behavior. Concurrently, what were once stand-alone risk metric firms have been bundled…

Read more at WealthManagement.com.