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Risk = Volatility?

Posted: 2019-May-04 20:29 by LZYEllis

Hello all. Recently started working on a portfolio model and early research suggests that the Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks. CAPM is widely used throughout finance for pricing risky securities and generating expected returns for assets given the risk of those assets and cost of capital. In my mind this is a dumb way of defining risk. The only risk that matters is loss of money and if price goes up or down while holding, who cares? Just wait to sell when price is better. More volatility would make chance of price reversal higher, no??

Posted: 2019-May-09 21:30 by SIC55

Sure. In a real money situation the volatility is sorta theoretical. You have a buy price & a sell price. If there is +flow between the two events, a real money trader might not even notice a market value adjustment.

CAPM doesn’t try to address the buy/sell mechanics. Its main goal is the identification of an optimal portfolio, which generally requires leverage, and leveraged positions introduce the risk that the entities providing the leverage will call the leverage back if the market value of the supporting asset gets too low. A forced sale at a low price wouldn’t allow for mean reversion, which would produce the sort of real money loss that you consider important.

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