The Risk Rating is Stockopedia’s classification of the normalised 3 year market volatility of the company’s share price. We have designed the Risk Rating to be both a useful predictive measure of future volatility, but also a useful predictive factor for accessing the Low Volatility premium.
The five classifications (from least to most volatile) are Conservative, Balanced, Adventurous, Speculative and Highly Speculative. At any time 10% of the market will be classified as Conservative, 15% Balanced, 20% Adventurous, 25% Speculative and 30% Highly Speculative. We use proprietary measures of volatility, which account for the fact that some stocks have shorter histories and/or are traded less frequently than others.
Volatility is the most common measure of risk used in quantitative finance to assess risk adjusted returns. The use of volatility as risk is somewhat controversial, and criticised by many famous value investors who believe that ’risk is not volatility, it is the likelihood of capital loss’. While this is certainly the case, most value investors have struggled to quantify the likelihood of capital loss, and price volatility remains one of the best predictors of future financial risk. We do recommend assessing the full suite of financial risk indicators on Stockopedia including measures of Bankruptcy Risk, Earnings Manipulation Risk and other Quality factors. Download our extensive eBook on the RiskRating here or read up in The Guide.
It’s worth noting that while most investors believe that higher returns can only be found by taking on more risk, the Low Volatility Anomaly has proven that low volatility stocks provide comparable returns to higher volatility stocks for less downside risk.