As with all of our surveys, we invited our cosponsors to come to the luncheon and make brief presentations, and four did. One, Steve Shefras from BiSam, mentioned how it is often said that risk and return are two sides of the same coin. He went on to say that he believes they're on the same side. I immediately thought of a totally different anaology: a Möbious strip!
You may be familiar with them. They come from the mathematical field topology, that deals with "mapping." A Möbious strip is a one-sided object. You can build your own by taking a long strip of paper, twisting it, and then connecting the ends. If you traverse either "side," you'll cover both "sides," meaning there is only one side.
And so, rather than saying that risk and return are on the same side of a coin (which encourages one to ask, "what's on the other side?"), we could say that they're both on a Möbious strip, and therefore on the same (and only) side.
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There's a lot of value in this view of risk and return being on the same side, as opposed to being on opposite sides of a coin. After all, so-called "risk" is the source of return, both in terms of market exposure and an active return. You can't have one without the other. In the statistical sense, risk measurements help to describe the return, and so they are essential to the return. In terms of measures of uncertainty, such as standard deviation, risk sets a reasonable range for potential returns. In this way, it does not distinguish between "good" and "bad" returns (or "upside" vs "downside" events.) That is true to its essential quality as a descriptor of the return. This view is consistent with other ideas which consider a "performance" report that only contains return and no risk to be incomplete.
ReplyDeleteSteve, I'll take that as an endorsement of my use of topology and the Mobious strip ... thanks!
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