A Quick Look at Methodology

October 26, 2022

The RiskPro Difference

The RiskPro algorithm employs an innovative approach that calculates the current (12-month) volatility of each security and the relationship between securities within a portfolio and the S&P 500. This data is then used to estimate the long term (30-year) average volatility and risk tolerance.

Calculating short term volatility in conjunction with estimated long-term volatility is an important component of estimating risk tolerance, as it allows the RiskPro algorithm to quickly identify changes in the risk of a portfolio and/or individual security.

Over the short term (i.e., a future 12-month period), the direction of markets is uncertain. As a result, RiskPro calculates portfolio risk tolerance with an equal probability of estimated maximum gains or losses over any future 12-month period. This approach is another important factor that leads to an estimate of risk tolerance by RiskPro with a 98% confidence level.

It's important to educate your clients so they can gain more confidence during volatile markets with information like the chart below from J.P. Morgan's Guide to the Markets. Letting investors know that historically, there have been more years with positive stock market returns, and with greater magnitude, than years with negative returns and the longer the holding period, the more likely it has been to achieve positive returns. 

There's no better time to use RiskPro to create new and/or revisit existing Personal Risk Tolerance Budgets that every investor needs to feel more confident about staying the course.