Takeaway: Consider risk allocation

We’re committed to making your practice better, so all this month, we’re delivering you a daily takeaway.

Today’s takeaway is…

Consider risk allocation

Take a typical pension plan asset mix:

• 36% Canadian bonds
• 35% Canadian equity
• 14% international equity
• 13% international equity, EAFE
• 2% cash

When viewing it by asset allocation alone, the portfolio looks to be well diversified; most investors would be pleased with the amount of diversification represented. But look at the same portfolio through the lens of risk and we see a different picture.

Portfolio risk, as measured by standard deviation, is approximately 9.4%. When reviewing the mix from the perspective of risk allocation, it would appear equities account for 62% of the portfolio, yet are responsible for 96% of the total risk.

Want more? Read: From asset to risk allocation

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.