Talk:Risk and return

Sue, I see where you're coming from. As you'll see in what I did in the live page, the approach I'm taking is to avoid introducing new terms and concepts (like asset allocation) or introductory text (e.g., "this is why this is important") at this point, but to build up from the basic concept of uncertainty of returns. Hopefully why this is important is clear from what I wrote in the live version. Asset allocation will be introduced as we start discussing how to manage risk.

Personally, I would prefer to avoid even using the term Asset Classes yet, but deferred to Barry (for now) since he used it in the section title. I was thinking of this entire section just as the Introduction.

I realize that this style may be different than a more tutorial style. Hopefully we can try it, and get some feedback from Bogleheads (including newbies) as to whether or not it works. --Kevin M 17:56, 30 March 2012 (CDT)

I revised the spreadsheet charts and uploaded the MS Excel file to Google Docs: Risk.xlsx. I didn't convert to Google Docs format, as it loses the charts. The link will show a preview. File --> Download to save the file. I'll continue to work on this section. --LadyGeek 19:06, 30 March 2012 (CDT)

Feel free to modify the section title if it doesn't work. "Asset Classes" didn't fit in the current context, so I renamed it to something that's easy to understand and works with the ensuing discussion. --LadyGeek 20:32, 30 March 2012 (CDT):


 * Note the t-bill chart in the figure is missing one of its data bars.--Blbarnitz 04:18, 31 March 2012 (CDT)

The discrepancy is due to the sampling bin size. I redid the spreadsheet from 10% to 5% return size bins and the charts now match. It's also better for presentation.--LadyGeek 12:23, 31 March 2012 (CDT)

CHARTS

The first two charts are very good; much cleaner and crisper. However, all charts should use the same vertical scales, so the third chart should be redone (also no reason to use a different color). I too first used different scales, but noticed that the textbook I'm using as a reference did not. In thinking about it, I realized that the purpose of using the same scale on all charts is to graphically put in perspective the much smaller number of years in each bucket as dispersion increases. Since the vertical scale is not returns, there's no reason for the bars to be taller and a different color in the third chart.

Although I don't feel as strongly about it, I find at least the min, max and mean figures to be useful (we could leave out StdDev, although I planned to refer back to it at some point). The most important is the mean, because it's impossible to determine the mean visually (could change it to "average" if we think people will understand that better; strictly speaking, it's the arithmetical mean, but I see no point in using a more technical term than necessary at this point). Seeing the increasing mean values from chart to chart clarifies the higher average return as dispersion increases, which emphasizes the relationship between magnitude of returns and uncertainty. The min and max are useful because you can't really read them from the charts, but are less important because you can get a rough idea of them. Could you annotate the charts so that at least the mean, perhaps also the min and max, and maybe even StdDev are included in the upper left quadrant of the charts, similar to the current annotation i the third chart (about the scale)?

With these changes, (minimum redo third chart, hopefully add at least mean, and maybe the other stats), let's move these charts into the live version.

WRITING STYLE

The is somewhat a repeat of what I said in first entry above, but I'll expand. First, this redo is very nicely written. However, it completely changes the style of the article.

I'm going for a certain pedagogical, expository style; start with the simplest concept, and build up one concept at a time. The first concept is "uncertainty of returns as risk". As a matter of fact, that might be what I'd title the first section (and move discussion of "higher returns require higher risk" to a second section).

There are already many wiki articles that discuss asset allocation; it was already discussed in the Investment Philosophy article, which if the Getting Started flow is followed, will already have been read. This article is about risk. We'll get to AA as a way to manage risk in a subsequent section, but before introducing the concepts of AA and managing risk, let's just build up an understanding of risk as uncertainty. The first two paragraphs completely change the pedagogical style; starting right off by mentioning AA as a way to manage risk changes this into an AA article.

The charts are not the main topic; they are there to support the ideas introduced in the text. This is why live version starts with a discussion of the relative certainty of returns for money market securities, then references the first chart to support. Similar for bonds and stocks. This version reverses that.

The live version achieves the desired expository style, which is the style I had planned on using as sections are added. My preference would be to use that as the starting point for the redoing page, then if desired, tweak the writing for clarity, a step at a time, but not completely rewrite it. --Kevin M 13:08, 31 March 2012 (CDT)


 * I redid the charts to include the statistics in the upper left quadrant (min, mean, max, standard deviation) and moved them into the live version. The size was increased slightly in the live version for better clarity. --LadyGeek 14:28, 31 March 2012 (CDT)