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4 Different Risk Factors & Why They’re Important

Using advanced methods similar to the leading institutional investors like PIMCO, Stratifi quantifies risk within a portfolio into a simple 1 to 10 scale, with 1 signifying the lowest risk possible and 10 the highest risk possible. 

The PRISM rating can be applied to a model portfolio, an individual account, and even blended for a multi-account household.

We are all familiar with the saying – no risk no reward. 

While taking risk is important to get return, it is equally important to understand the risk you are taking because it will test your conviction during uncertain times. 

The challenge with risk is that it is often invisible to the naked eyes so we designed our system to visualize different risk factors on a simple 1 to 10 scale:

Tail Event Risk

Sudden and severe market losses happen. This is important because it’s not the probability of the tail event that matters, it’s the severity that matters.

Reducing tail event risk means lowering exposure to massive losses when something catastrophic occurs with the markets. This is one of the best ways to neutralize volatility and defend against losses during a sustained market decline.

Diversification Risk

When correlation to a particular asset class is high, you do not have a diversified portfolio. This score measures the overall diversification.

This is important because reducing this risk may show that new investments added to the portfolio help improve the level of diversification in the portfolio and reduce the potential downside.

Volatility Risk

It is likely that each of your assets are positively or negatively correlated to volatility. Volatility is the only real asset class and drives the portfolio return. This score measures the return potential during up/down markets.

This is important because increasing this risk may increase the return of the portfolio during bull markets but may lead to catastrophic losses during bear markets unless balanced with a lower tail risk score.

Concentrated Stock Risk

A portfolio may have exposure to different stocks either directly or indirectly. This score measures concentrated exposure to different companies.

This is important because increasing this type of risk may significantly increase return but may also lead to permanent loss of capital if a company goes bankrupt or suffers.

A portfolio may have exposure to different stocks either directly or indirectly. This score measures concentrated exposure to different companies.

This is important because increasing this type of risk may significantly increase return but may also lead to permanent loss of capital if a company goes bankrupt or suffers.

Our PRISM™ risk analysis software uses a blend of risk tolerance questionnaires, historical market events, and current market signals to provide advisors with all the data they need to know about their customers and plan accordingly.

If you work with 4 or more advisors in your firm, request a free demo.

Karan Motreja Author

I help make life easier for financial advisors. With our PRISM Ratings Tool, your clients can finally understand the risks associated within their portfolio, giving you the ability to take concrete action to lower these risks, while giving your clients peace of mind.

Additional Advisor Resources

Bob Veres features StratiFi in ‘Inside Information’ February 2022 Edition

Bob asks, “Is it really possible that a portfolio risk assessment tool for wealth managers could be as sophisticated as the algorithms that institutional teams are using?”

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