Risk management

Risk levels decline despite world full of worries

Risk levels across the board have dropped for both the third quarter and year ended Sept. 30, according to data from Axioma Inc.

“Risk has come down, despite continued concerns about what's happening in Europe, the U.S. fiscal cliff and China slowing down,” said Melissa Brown, senior director of applied research for New York-based Axioma. “You would think all of those things would have led to an increase in expected risk, but in fact the opposite happened.”

Axioma's risk ratings represent the range of possible market returns based on how far up or down the index can move over the next six to 12 months, while the index volatility chart shows predicted daily risk levels over the past five years based on benchmark indexes.

In the third quarter, the Russell 3000 risk rating was 16.4%, down from 17.5% the previous quarter; the FTSE Emerging Markets was 18.9%, down from 20.3%; and the FTSE Developed Markets rating was 18.5%, down from 25.4%.

While the risk forecast for the U.S. dropped 1.2 percentage points to 16.3%, Greece experienced the largest decrease in risk by country with a 43.9% rating, down from 60.7% the previous quarter.

For predicted volatility, Greece also had a 4.7-percentage-point drop to 33.1%. Spain, however, experienced a slight increase in volatility, reaching 25.8% for the quarter, up from 23.5% the previous quarter, but still down from 39.2% the year before.

Ms. Brown said that risk has come down over the past 12 months partially because of the past quarter's market performance and has been moving down from the peak seen in the third quarter of last year.

“One possibility (for the decrease in risk) is that investors are looking around and they don't really know what to do, so they aren't doing anything,” Ms. Brown said. “When you're not seeing a lot of price movement, volatility goes down.”

Volatility by industry dropped in both the most and least economically sensitive industries. Airlines and automobiles were the most volatile, but were both down to risk ratings of 26.2% and 24.9%, respectively from 27.7% and 25.4% the previous quarter. Meanwhile, tobacco and pharmaceuticals were the least volatile industries but still experienced decreases to 16% and 16.7% from 16.9% and 18% the previous quarter, respectively.

Each of the top 10 most volatile currencies in both developed and emerging markets experienced a decrease in risk levels. Ms. Brown also pointed out that despite growing concerns about the euro, it was only the sixth most volatile developed market currency with a 9.1% rating, down half a percentage point from the previous quarter.

This article originally appeared in the October 15, 2012 print issue as, "Levels decline despite world full of worries".