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Is Risk Mispriced?

VIEW SPECIAL REPORT (PDF)

SUMMARY

This special report examines the aftermath of the prolonged period of low interest rates, especially the impact on investor risk tolerance. As government policy encouraged low rates and quantified easing ensured capital was injected into the economy, investors soon realized that conservative investments wouldn’t provide much in returns, while riskier investments had some built-in monetary support. Given economic policy and the strong guidance of where it was headed, even conservative investors searched for higher returns and typically riskier investments seemed like a safe place to find them.

In this report, you’ll learn more about what might happen next, as interest rates eventually start to rise and investors wake up to added risk exposure. Also included is a simplified explanation of the Sharpe ratio which measures the excess return of a portfolio relative to the risk taken to achieve that return, a helpful measure in times such as these.

KEY TAKEAWAYS

  • The extremely low interest rate environment – which has lasted longer than expected – has created many significant unintended consequences for both U.S. and global markets.
  • Since 2009, investors have taken on more risk in hopes of earning higher returns, while economic policy supported this line of thinking. As policy eventually returns to “normal,” investors should be prepared for the potential downsides.
  • Given the current situation, it may take you longer to exit from a specific position and you might not like your options at the time you need to sell.
  • Diversification across both major and sub-asset classes can help, but it may also be time to take defensive measures to protect your assets. It’s important to re-incorporate risk management into your investment strategy to prepare for unfavorable market scenarios.