What Is the Risk Curve?

The risk curve is 𒉰a two-dimensional display that generates a vi🐻sualization of the relationship between the risk and return of one or more assets.

The risk curve can contain multiple data points representing various individual securities or classes of assets. It is used to display this data for purposes of mean-variance analysis, which is central to understanding the relative risk and return of different asset classes and categories in portfolios and in investment models such as the 澳洲幸运5开奖号码历史查询:Capital Asset Pricing Model (CAPM) and 澳洲幸运5开奖号码历史查询:Modern Portfolio Theory (MPT).

Understanding the Risk Curve

The risk curve is used to display the relative risk and return of similar ꦑor dissimilar assets. Typically, the x-axis (horizontal) representsꦆ risk level and the y-axis (vertical) represents the average or expected return. Generally speaking, the risk curve balloons when the investment being considered offers greater risk and returns and contracts when it offers lower risk and returns.

For example, a relatively 澳洲幸运5开奖号码历史查询:“risk free” asset such as a 90-day U.S. 澳洲幸运5开奖号码历史查询:Treasury bill will be positioned on the lower-left corner on the chart—while a riskier asset such as a 澳洲幸运5开奖号码历史查询:leveraged ETF or a small-cap growth stock will appe🐷ar toward the top right.

Riskier assets with a wide range of historical gains and losses will also tend to a higher average expected return. In other words, the tradeoff between an investment's risk and 澳洲幸运5开奖号码历史查询:expected return tends to be proportional.

The Ri🍸sk Curve in MPT and the Efficient Frontier

Modern Portfolio Theory makes use of the risk curve to display the potential benefits of different portfolios across the 澳洲幸运5开奖号码历史查询:efficient frontier. Portfolios that lie below the curve or efficient frontier are sub-optimal, because based on historical returns, they do not provide enough return🅠 for the level of risk assumed.

Portfolios that cluster to the right below the curve aﷺre also viewed as sub-optimal because based on historical returns, they return proportionately less than what mꦰay be available in other portfolios of similar risk.

Special Considerations

It should be noted that the data typically used in creating risk curve models are based on the historical 澳洲幸运5开奖号码历史查询:standard deviation of each asset.

For example, a point on the chart representing an investment in the 澳洲幸运5开奖号码历史查询:S&P 500 Index will take into account the level of risk implied by historical variance in returns and also the expected mean (av⛄erage) return on the index as a whole. The periods that the data represent w🔴ill affect the asset's position on the risk curve. The actual future risk and return that investors experience going forward, of course, varies daily and is unknown.