Volatility and Risk

By Ramesh Akkineni
For followers of Modern Portfolio Theory, Risk is defined in terms in terms of short-term market fluctuations. To them, the greater the volatility of the security or portfolio, the greater the risk. So they try to diversify by holding securities that do not move in same direction at the same time. It is better for us to see most of our competitors trying to make their portfolios less volatile. For us risk is related to probability of permanent loss of capital, to the expected reward and not to volatility in prices. As other people shun volatile securities it improves our chance of finding undervalued ones in them.

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