How the RiskGrade Measure Differs from Traditional Risk Measures
RiskMetrics created the RiskGrade measure to address investors' needs for a consistent and reliable way to measure market risk. RiskGrade is a standardized measure of volatility, and therefore allows an "apples to apples" comparison of investment risk across all asset classes and regions. For example, we can say that a Brazilian stock with a RiskGrade measure of 300 is six times as risky as an Asian Bond Fund with a RiskGrade measure of 50. Furthermore, RiskGrades capture all components of market risk: equity, interest rate, currency, and commodity risk. The RiskGrade measure is consistent, dynamic, and global and operates differently from traditional risk measures, such as beta and standard deviation.    We will compare the RiskGrade measure to standard deviation and beta, as well as, how the RiskGrade measure uniquely captures currency risk and some of the limitations of forecasting risk in the four sections below.
RiskGrades Compared to Standard Deviation	Capture Currency Risk
RiskGrades Compared to Beta	Limitations of Forecasting Risk
Standard Deviation Standard deviation is a general statistical measure of volatility. It can be used to measure the dispersion from the mean of any data series, such as a time series of returns. Standard deviation has been a classical portfolio risk measure since Markovitz used it in the 1950s to demonstrate the diversification effect of stocks. As a measure of volatility, standard deviation and measures based on standard deviation (i.e. Sharpe Ratio) is very similar to the RiskGrades™ measure, although there are two main differences. The first is that RiskGrades estimates are based on exponential weighting of historical data, which makes them more adaptive to current market conditions than straight standard deviations. When J.P. Morgan released the RiskMetrics methodology, they revealed a study done with financial institutions and regulatory bodies around the world that demonstrated that exponential weighting significantly improves forecasting accuracy and responsiveness in extreme market conditions. The second difference is that the RiskGrade measure has been calibrated to be intuitive for the general public, with a RiskGrade measure of 100 representing the typical risk of the global equity markets. Standard deviations, however, do not have such an intuitive reference point: we can easily tell that a standard deviation of 5% represents more risk than 2%, but it's not obvious how risky that is (e.g., how risky is that compared to the risk of global equities?).
Beta  Beta measures how much an individual stock is likely to move with the general market. A beta of 1 means that a stock will tend to move lockstep with the general market, while a beta of 1.5 means that the stock will rise 1.5% for any 1% rise in the stock market, and fall 1.5% with any 1% fall in the stock market, on average. Beta can be used to compare the systemic risk of various stocks: the higher the beta, the more risk a particular stock is likely to contribute to a portfolio of stocks. While elegant in its simplicity, beta has several limitations which the RiskGrade™ measure addresses. First, beta is only a relative risk measure: it is a measure of how a stock is likely to move relative to an overall stock index, and does not give an indication of the stock's unique volatility (or the overall stock market's volatility). Beta can be misleading because two stocks with the same beta generally have a different level of risk. Second, it only measures incremental systemic risk for a perfectly diversified portfolio of stocks (i.e., a stock with a beta of 1 could easily contribute twice as much volatility as the broader stock market, if you have an undiversified portfolio).
Unique Characteristics of the RiskGrade™ Capture Currency Risk Since the RiskGrade measure is based on volatility estimates, it will vary according to the base currency of each investor. For a British investor who views the world from a British pound perspective, having pounds under the mattress is a riskless investment, and hence has a RiskGrade measure of zero. For an American investor, having pounds under the mattress carries currency risk, and thus the RiskGrade of the pound from a US dollar perspective is greater than zero. Similarly, an American investor who buys a German stock is exposed to two sources of risk: equity risk and currency risk. Therefore, the RiskGrade of a German stock from the point of view of an American investor is different from the RiskGrade of the same stock from a German investor's viewpoint. By explicitly accounting for currency risk, RiskGrades provide a more complete picture of risk than other simpler measures for investors with international securities and assets.
Limitations of Risk Forecasting RiskGrades have been designed as an intuitive, universal market risk measure for individual investors. The analytics behind these measures have enabled professional risk managers to reliably measure market risk for many years. As with all risk forecasts, however, the RiskGrade measure itself has the limitation of being based only on historical market data. It is not a Crystal Ball that can forecast hidden risks, such as the next major earthquake, political scandal, or war that could derail the markets. To capture such event risks, investors can use the portfolio management functions available with RiskGrades to vigorously stress test their portfolios and apply various market scenarios to get a full picture of their risk.