Why Risk Is More Than Volatility

The Sharpe / IR / mean-variance framework treats Volatility) — definition">standard deviation as the measure of risk. This is convenient — variance is mathematically tractable, leads to the efficient frontier, and is the foundation of modern portfolio theory.

It is also incomplete. Standard deviation does not capture:
- Asymmetric losses (a -50% drawdown is recovered only by +100% gain — variance treats them symmetrically)
- Tail events (the 2008 GFC, 2020 COVID, 2022 stagflation — extreme moves that occur more often than a normal distribution would predict)
- Sequence risk for retirees (negative returns early in retirement deplete the corpus more than equivalent negative returns later)
- Liquidity risk (you can't sell at NAV in stress — Franklin 2020, Lehman bond markets 2008)
- Counterparty risk (your broker fails, your AMC commits fraud, your custodian has issues)
- Inflation risk (especially severe for nominal-fixed-income portfolios)

Sophisticated risk management goes beyond variance to address these dimensions explicitly. This module covers the framework.

Now apply this — identify the largest single risk in your portfolio →