Measuring risk is a tricky business

Viewpoint

Advisers are in a bind. It's their duty to give advice that corresponds to the risk tolerance of the...

Advisers are in a bind. It's their duty to give advice that corresponds to the risk tolerance of their clients. Yet the way the regulator defines risk, and the way most advisers go about creating portfolios, makes it more rather than less likely they will give inadequate advice. Just how widely the concept of risk is misunderstood is shown by the precipice bond fiasco. The intermediaries who sold these bonds confused a small probability of an event occurring - a capital shortfall at maturity - with the risk. Why did they make this fundamental mistake? At least partly because of the way the...