Intech explores whether volatility is truly captured by standard deviation and why that assumption may mislead investors. The paper argues that small misestimates in risk can materially distort outcomes, and challenges the idea that a single metric fully explains portfolio risk.
Is Volatility A Friend Or A Foe?
Adrian Banner, David Schofield
Research
10 Pages
Key Takeaways
Standard Deviation Limits: Traditional volatility measures can underestimate risk by over 20%, leading to misaligned portfolio decisions and overstated risk-adjusted returns.
Estimation Error Impact: A 10% volatility underestimation can materially increase downside exposure, compounding losses during stress periods and skewing long-term capital allocation.
Process Over Metrics: Using multi-period data and refined estimation methods improved risk forecasts across 30+ year simulations, highlighting structural flaws in single-period volatility models.
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