Free Essay About Risk Return: Article Analysis

The paper focuses on an examination of the article Same Returns, Less Risk by Levisohn and Light. It occurs through a summary of the article and subsequent comparison of its contents to the chapter on risk and return.

Article Summary

The article depicts investors’ current hesitation to invest in various assets. It follows the impacts of risks associated with the recent financial crisis and other complications. The authors highlight the need to avoid hesitation in times of uncertainty in the market. Investors should take advantage of the market’s volatility; in such times, there is a high chance of ordinary investors panicking and selling at the worst moments.
Through the concept of risk allocation, investors can avoid panicking; this occurs by delivering a gentle ride while still producing stock-like returns in the long-term. Under normal circumstances, in the asset-allocation model, the investors devote portions of their portfolio to various asset classes; the portions go to stocks and bonds based on their expected returns. The risk allocation process reduces the risk of stock through safer bonds and other assets. Risk-based portfolios focus on volatility and not expected returns. A risk allocation approach is effective in placing emerging-market bonds with stocks and other volatile assets; this provides a clearer depiction of the risk involved.
In reference to new products, the authors explore investors’ focus on strategies such as risk control, risk budgeting, and risk parity as risk allocation methods. Risk budgeting helps in addressing the challenges of traditional asset allocation. It helps investors decide how much volatility they are willing to take. Risk parity allows the spreading of volatility equally between asset classes. Risk control focuses on keeping the volatility of an equity portfolio constant; this occurs by selling stocks with the rise of volatility, and buying with the decrease in volatility. The strategies influence asset managers’ focus on exchange-traded funds and mutual funds. In the past year, investors focused on launching risk-based products and seeking regulatory approval for the launching. Investors can take advantage by figuring out how to use asset volatility to their advantage. It can occur through the use of strategies discussed above.

Article Comparison to Chapter

The article reinforced the concepts outlined in the chapter. It takes advantage of risk and return information through a focus on various important factors including risk allocation; risk budgeting, risk parity, and risk control; volatility, and new products. It depicts how a comprehensive consideration of the risk, return, and risk aversion concepts can help investors in making profitable decisions. According to Levisohn and Light (1), it helps in understanding and taking advantage of volatility in the market. The risk aversion concept helps many investors in avoiding risk. According to the chapter, most investors require an increase in return for any given increase in risk. The approach makes many of them unwilling to take uncertain risks. It poses the need for effective risk assessment before investments occur. It occurs through a focus on sensitivity analysis and range.
The article depicts a clear understanding of strategies involved in measurement and assessment of risk. It is evident through a focus on the effectiveness of the risk allocation concept. The risk allocation strategy helps in determining the portions of the portfolio allocated to various assets. For instance, an investor can allocate 40% to bonds and 60% in stocks. It also guides investors in adopting emerging-market bonds that perform more like stocks than U.S. Treasury bonds. The article depicts how taking advantage of the relevant risk, and return information can facilitate the use of a risk allocation strategy that produces a safer portfolio.
Through the information and examples provided in the article, the reader establishes an understanding of how the risk and return concepts discussed in the chapter can apply in real-life situations. It gives investors a review of the major considerations concerning risk, return, and impact during the development of a portfolio.

Works Cited

Levisohn, Ben and Joe Light. “Same Returns, Less Risk.” The Wall Street Journal 14 June 2012. Print. Available from: <http://www.wsj.com/articles/SB10001424052702304821304577438361425353648 > [Accessed April 3, 2015]