Mathematical - The Cost of Risk

The cost of uncompensated fluctuations in value or risk is called Variance Drain. This occurs when risk is experienced without commensurate return. Given two portfolios with identical returns, like depicted below, the one with the lower risk will compound to the higher ending value.

Variance Drain

Variance Drain Example… Start with $1. You invest it in your checking account that pays 0% interest for 2 years. How much do you have? Take the same dollar and invest in the market. Year 1, the market goes up 10%. Year 2 the market goes down 10%. +10-10 divided by 2 = 0% How much money do you actually have? Back