What is a RiskGrade™	Site Tour Menu What is a RiskGrade™ Getting RiskGrades™ Enter Your Portfolio Calculate Your Portfolio RiskGrade™ Before You Buy or Sell, Ask "What If?" Return Analysis RiskRanking Risk Alerts Become an Expert
A RiskGrade™ RiskGrade™ is a new statistic, a measure of price volatility recently devised by RiskMetrics to help investors better understand their market risk. RiskGrades™ are scaled from 0 to 1000 and more, where 100 corresponds to the average RiskGrade™ of a diversified (market-cap weighted) index of international equities during normal market conditions.

The Nature of a RiskGrade™ RiskGrades™ are  dynamic changing over time to accurately reflect market conditions, allowing for comparisons in an intuitive fashion, and capturing currency risk. For example, the RiskGrades™ of major stock markets can easily escalate beyond 200, while in calmer markets RiskGrades™ could fall below 75. The graph below shows the RiskGrade™ of the Nasdaq equity index from the end of 1995 through April of 2000.

Note In April of 2000, the Nasdaq suffered a 33% drop in 3 weeks. Prior to this move, the Nasdaq's RiskGrade™ quietly rose from 119 to 180 during the months of January, February, and March (a 66% increase in riskiness) foreshadowing a riskier marketplace.

What is Portfolio Diversification? A time tested risk management technique and common approach practiced by professional money managers to minimize the ups and downs of a portfolio is diversification. There are three general types of diversification. Sector Diversification: An easy way to think about diversification is that on any given day not every stock traded on an exchange will go up or down together. When stocks of a specific company type go up or down independent from the greater market, this is known as sector diversification.  Geographic Diversification: The technology stocks are down, but the utilities are up. You can then extend this argument further. The US stock market may go down today, driven by local concerns. However, Germany's stock market may rise. This type of diversification is known as geographic diversification. Asset Class Diversification: We can also throw another layer of diversification into the mix -- asset class diversification. Simply stated, asset class diversification assumes that stocks and bonds may not both go up or both go down on any one given day. Using all these different types of diversification, geographic region with asset class, sector within asset class, etc., you will get what professionals consider a well-balanced portfolio. A little confused by all this? Diversification is just good old common sense. Mix things up a little.

Quantifying Portfolio Diversification, or The Sum of the Parts DOES NOT Equal the Whole When we calculate a RiskGrade™ for your portfolio, we factor in all the different types of diversification effects. If you construct a portfolio of four stocks - IBM, General Electric, General Motors, and AT&T - we compute a RiskGrade™ measure of 145 for the portfolio (table to the right).The portfolio RiskGrade™ measure of 145 is less than the RiskGrade™ measures of each of these individual stocks. We also calculate the diversification benefit in RiskGrade™ terms, which for this portfolio is 77. In essence we are telling you that the effects of diversification are making your portfolio 34% less risky. Hence, in a portfolio, the sum of the individual stocks' RiskGrades™ do not equal the whole.

Stock RiskGrade IBM 214 General Electric 193 General Motors 202 AT&T 278 Portfolio 145