Reviewing Risk and Return

What’s your tolerance for risk?

Global Market Update - Victorian Risk Assessment

Source: Flikr

Some people see risk and see only danger: lions and tigers and bears, oh my! Others look at risk as an opportunity for an adrenaline-rush: backflips off cliffs into mountain lakes, bungee-jumping off bridges and buildings. Risk is an integral part of finance. Different asset classes have different levels of uncertainty regarding their underlying cash-flow. This uncertainty translates into a risk-profile.

We’ve discussed before how there are three major asset classes. Bonds represent a senior claim on cash-flow. They’re first in line if things go wrong. Real-estate is a claim on operating cash—rents, leases, and mortgages. And stocks are a residual claim. They get what’s left over, after other obligations have been met—but they also benefit from any growth. The more senior the claim, the more certain you can be of getting your money back.

It’s sometimes said that risky portfolios return more. That gets the equation backwards. In order to receive a higher return, you have to go down in the capital structure. Residual claims on cash-flow get the growth, but they also get wiped out in bankruptcy. Higher potential return equates to higher risk. It’s true within a company, and it’s true in an economy. The more senior claims in an economy’s capital structure tend to have lower potential returns.

Victorian explorers may have gotten a rush from crossing deep chasms on rickety bridges, but they didn’t take their families along. They understood that the upside of fame and fortune came with a big potential downside.


Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
Leave a comment if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

www.chartertrust.com • www.moneybasicsradio.com www.globalmarketupdate.net
By | 2017-07-17T12:23:10+00:00 December 8th, 2014|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
Leave a comment if you have any questions—I read them all!
– And Follow me on Twitter @GlobalMarketUpd

Leave A Comment