Understanding asset and portfolio risk

Retail investments are generally composed of a number of asset types. The level of risk tolerance between one investor and another differs, not only the composition of portfolios but also the diversity in terms of asset allocation, asset type selection as well as maturity profile of underlying investments will characterise a portfolio and make it distinct from any other portfolio. In addition to investments such as equities, bonds, money market instruments and/or foreign currency, the investor’s overall portfolio might also include investments/exposures to pension funds, life insurance policies with a savings element embedded in them, and others. Investors must be aware of the correlations between the returns of different assets, and how such returns behave during differing market conditions when evaluating the risk of a portfolio. For example, the returns on high yield bonds are generally less volatile than those on equities, and over recent years, there has been a strong relationship (correlation) in their returns. On the other hand, there is a weak relationship between returns on high yield bonds for instance and the returns on the ultra-high grade sovereign bonds, such as...