Realized Risk is the historically realizedexposer to danger, harm, or loss
Realized is to become fully aware of something as a fact; understand clearly.
Risk isexposer to danger, harm, or loss.
True Riskis the historically true exposer to danger, harm, or loss
Actual Riskis the historically actual exposer to danger, harm, or loss
For example, investment risk is often understated by annualized return tables or standard deviation that excludes the drawdown. For example, below is a table that shows S&P 500 annual returns over different time periods, such as the last 10 years average annualized +9.6% and the last 15 years average annualized +10.2%. It leaves out the other side of the return profile necessary to understand theRisk/RewardRatio. Presented by itself, the “Trailing Total Returns” table ignores the downside risk and drawdown the investor would have to endure to achieve the stated return.
The realized risk is the historical drawdown. For example, the chart below shows two large drawdowns of around -50%. At a minimum, expected risk is the amount of the historical drawdown but next time could be worse.
The fact that markets returns aren’t always positive and we don’t actually experience “average returns” is why we believe drawdown control is essential. At Shell Capital, we apply proprietarydrawdown controlsystems designed to manage our downside risk at the portfolio level.
