INVESTMENT TOPICS

TIFF Education Foundation > Investment Topics > Risk Tolerance

Risk Tolerance

This section discusses risk tolerance, or the amount of risk an investor is willing to take given his or her return goal, a topic of paramount importance in investment decision-making and endowment management. (Click on the links below to open PDF files in a new browser window.)

Thinking About Risk
Many investors have been so conditioned to examine carefully the risks inherent in each investment that they make — to make sure that their downside is tolerable — that they ignore entirely or give short shrift to the important question of whether their upside is adequate.

"Alternative" Investment: Balancing Risks and Rewards
The principles that underlie most successful attempts to diversify institutional funds beyond domestic stocks and bonds are in fact the same principles that animate successful investment programs that are confined to these two traditional asset classes.

Exogenous Risk vs Endogenous Risk
"Exogenous risk" is a fancy way of describing what most investors focus on when they ponder why securities move up or down in price. Public information gets reflected pretty rapidly in securities prices. Stock or bond prices may be unjustifiably high or low in relation to such information, but if the information is disseminated widely, then the safe assumption is that securities prices already reflect it.

M²
One nice thing to be said about both the M² and Sharpe methods is that they are robust enough to accommodate multiple definitions of risk. For example, many investment professionals whose early training instilled a near-religious belief that "risk" means total variance now freely confess that downside variance better describes what their clients seek to avoid.

Commentaries