What Does RiskGrades Mean?

RiskGrades (RG) is a trademarked method for calculating the risk of an asset. RiskGrades is a standardized measure for evaluating the volatility of an asset across a variety of asset classes. The scale starts at zero which is the least risky rating. A rating of 1,000 equals the standard market risk of a diversified market-cap weighted global equity index. RiskGrades change over time to reflect not only the unsystematic risk of an investment but also increases in overall systematic risk in the market. RiskGrades are based on a variance-covariance approach that measures the volatility of assets or asset portfolios as the scaled standard deviations of the returns.

More complex RiskGrades calculations allow for a few additional concepts. To calculate the RG of an asset, use the following formula:

RGi=si÷120.2where:si=monthly standard deviation of the asset\begin{aligned} &\text{RG}_i = \frac { s_i \div 12 }{ 0.2 } \\ &\textbf{where:} \\ &s_i = \text{monthly standard deviation of the asset} \\ \end{aligned}RGi=0.2si÷12where:si=monthly standard deviation of the asset

The RG of a portfolio of 2 assets is calculated with the following formula:

RGp2=(W12×RG12)+(W22×RG22) +RGp2=2×W1×W2×r12×RG1×RG2where:W=weighting of the asset\begin{aligned} &\text{RG}^2_p = ( W^2_1 \times \text{RG}^2_1 ) + ( W^2_2 \times \text{RG}^2_2 ) \ + \\ &\phantom{\text{RG}^2_p =} 2 \times W_1 \times W_2 \times r_{12} \times \text{RG}_1 \times \text{RG}_2 \\ &\textbf{where:} \\ &W = \text{weighting of the asset} \\ \end{aligned}RGp2=(W12×RG12)+(W22×RG22) +RGp2=2×W1×W2×r12×RG1×RG2where:W=weighting of the asset

The Undiversified Risk Grade (URG) of the same portfolio uses the following formula:

URGp=(W1×RG1)+(W2×RG2)where:W=weighting of the asset\begin{aligned} &\text{URG}_p = ( W_1 \times \text{RG}_1 ) + ( W_2 \times \text{RG}_2 ) \\ &\textbf{where:} \\ &W = \text{weighting of the asset} \\ \end{aligned}URGp=(W1×RG1)+(W2×RG2)where:W=weighting of the asset

To determine the benefit from diversification, we can use RiskGrades to determine the Diversification Benefit:

DBp=URGpRGp\begin{aligned} \text{DB}_p = \text{URG}_p - \text{RG}_p \\ \end{aligned}DBp=URGpRGp

Formulas for calculating RiskGrades (RG).

Understanding RiskGrades (RG)

RiskGrades were developed by JPMorgan. You can use RiskGrades to determine the level of risk in your portfolio based on the following numbers:

The RGof a risk-free asset is expected to be zero.

The RG of a low-risk asset is expected to be zero to 100.

Normal stocks/indexes should have an RG of 100 to 300.

Stocks with an RG of 100 to 800 are considered high risk.

IPOs have an RG greater than 800.