Foreword
In 1994 J.P. Morgan, the global investment bank, launched
RiskMetrics™, a transparent approach to measuring the risk of
financial assets. RiskMetrics educated the world on the importance
of understanding financial risk, and provided a data set to give
institutions the ability to calculate their own risk exposures, as
well as a technical document explaining all the mathematics behind
the methodology. RiskMetrics was fully transparent and open, and
free to all market participants and observers.
RiskMetrics quickly became the standard for institutions around
the world to measure and manage their financial risks. Shortly
after the launch of RiskMetrics, the regulators from the G-7
countries adopted a requirement that all banks report their market
risk exposure. Over the last few years similar requirements have
been extended to non-G-7-country banks, as well as non-financial
institutions. Value-at-Risk, or VaR, the approach RiskMetrics made
public, has now become the standard risk measure for over 5,000
institutions around the world.
The success of RiskMetrics was obvious. It filled a market need.
Global markets were becoming more volatile and interrelated, more
complex instruments such as derivatives were being traded, and
firms were deriving an increasing amount of their profits from
trading and investments in financial assets. Institutions were able
to quantify the returns of these activities, but few were able to
accurately measure their risks. They knew that some investments
were riskier than others, but they didn't know by how much, or how
to quantify the total risk of their portfolios of investments.
RiskMetrics was successful because senior managers, regulators,
and shareholders recognized that Return Is Only Half the Equation.
No decision should be made without understanding both the risk and
the expected return of the outcome. RiskMetrics gave managers for
the first time a transparent and consistent approach to quantify
the risk of each of their financial investments and compare it to
their expected returns, so that they could make better and more
informed investment decisions.
Today there is a similar market need. Individuals around the
world are taking on more responsibility for their financial
futures. Investors as well as their financial advisors are looking
at increasingly volatile markets and a wider array of increasingly
complex investment options. And an individual's financial
investments are more important to his future life than ever before.
While individuals are given detailed return information, the best
risk information they can get is "this stock or portfolio is
aggressive," which they understand is riskier than "this stock or
portfolio is moderate or conservative." They know that stocks are
riskier than bonds, which are riskier than cash, but they don't
know by how much, or how to quantify the total risk of their entire
portfolio of investments.
To meet this need, the group that was responsible for
RiskMetrics at J.P. Morgan is launching RiskGrades. RiskGrades is
an open and transparent benchmark for individuals and their
financial advisors to measure financial risk. RiskGrades include
several components. First there is an online course,
Understanding Risk, explaining the basic concepts of
financial risk. Second, there is the RiskGrade TM data set allowing
individuals the ability to measure the risk of stocks, bonds,
funds, and other financial assets around the world. Third, there
are the RiskGrades online analytics giving individuals the tools
necessary to manage the risk of their own investment portfolios.
Finally there are two documents – Return is Only Half the
Equation™ , a practical risk management guide for individual
investors, and the RiskGrades® Technical Document, fully
exposing all the calculations behind the RiskGrades approach. And
all of the RiskGrades components are based on the same RiskMetrics
research and technology used by thousands of leading institutions
and regulators around the world.
The intent of RiskGrades is to help individuals make better
investment decisions. RiskGrades do not by themselves provide
advice, or make buy and sell recommendations. RiskGrades do not
tell you what stock will do better in any one year, or tell you
what investment strategy is right for you. Instead RiskGrades
provide information about risk – information that should be
considered, along with the return information you are already
getting, to determine the best investments for you and your
portfolio.
We have all grown accustomed to the infamous phrase "historical
performance is no guarantee of future results," and can be sure
that no mathematical model can predict the future. Ultimately,
successful investing can only be achieved by people – people who
have good information, good discipline, and good judgment.
RiskGrades provide some of that information, and some of that
discipline. The judgment is up to you, and when appropriate, your
professional financial advisor.
Ethan Berman
CEO
RiskMetrics
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